Are you a seasoned forex trader or a newbie starting to explore this dynamic investment market? Well, irrespective of your experience, you have probably heard of the importance of technical analysis in forex trading.
The Forex market is one of the volatile markets and technical analysis ensures you can smoothly overcome market risks and make a profit from each trading move. Also, the Worldwide Forex Market size is expected to reach 1462.67 USD by the year 2033.
When we talk about popular technical analysis tools, Elliott Wave Theory comes to mind. Though EWT is a more than 90-year-old technical analysis tool its popularity doesn’t seem to seize even current-day forex trading.
Not only that, several Algo trading software incorporate EWT in their pre-built trading strategies. Today, in this blog we will discuss everything you need to know about forex trading using Elliott Wave Theory.
The Forex market is one of the volatile markets and technical analysis ensures you can smoothly overcome market risks and make a profit from each trading move. Also, the Worldwide Forex Market size is expected to reach 1462.67 USD by the year 2033.
When we talk about popular technical analysis tools, Elliott Wave Theory comes to mind. Though EWT is a more than 90-year-old technical analysis tool its popularity doesn’t seem to seize even current-day forex trading.
Not only that, several Algo trading software incorporate EWT in their pre-built trading strategies. Today, in this blog we will discuss everything you need to know about forex trading using Elliott Wave Theory.
Understanding Elliott Wave Theory
Ralph Nelson Elliott, an accountant and thinker developed a trading theory in 1930. This theory is known as the Elliott Wave Theory or EWT. Here are the details of the Elliott Wave Theory:
-> The Impulsive Wave:
The Impulsive Wave or the Motive Wave refers to the first five patterns of the EWT pattern.
- Five-Wave Structure
- Characteristics of Each Wave
Wave 3 is the largest wave in the pattern that exceeds wave 1. Wave 4 is also corrective which increases buying trends. Wave 5 is the final leg in the impulse pattern indicating the dominant trends which are usually bullish in nature.
-> The Corrective Wave:
There is a total number of three waves in the Corrective that move against the dominant trend in the market.
Below, we will about them in detail:
- Three-Wave Structure (A, B, C)
- Different Corrective Patterns (zigzag, flat, triangle)
Below, we will about them in detail:
-> Zigzag pattern
A Zigzag pattern is a corrective pattern consisting of three different waves (5-3-5). It can indicate either a strong upward or a downward market movement.
-> Flat Pattern
The flat pattern also has three corrective waves (3-3-5). It also moves against dominant market trends. If the market is in a continued downtrend, the pattern indicates upward trends. And if the market is in a continued uptrend, the pattern indicates downward trends.
-> Triangle Pattern
The triangle pattern has 5 waves. This pattern indicates price fluctuations in the market before it becomes stable. It is also a corrective pattern that helps traders take a short position or sell position.
-> Fibonacci Retracement and Extension:
Many experts suggest that combining Fibonacci retracement and extension with Elliott Wave Theory can offer efficient and accurate results. The best crypto auto trading platform should allow you to use EWT with Fibonacci levels.
Fibonacci retracement and extension is a technical analysis tool that can be used to analyze charts. It indicates the high and the low points in the price movements of an asset helping traders set support and resistance levels. Combining it with Elliott Wave Theory can offer accuracy in analysis results.
Fibonacci retracement and extension is a technical analysis tool that can be used to analyze charts. It indicates the high and the low points in the price movements of an asset helping traders set support and resistance levels. Combining it with Elliott Wave Theory can offer accuracy in analysis results.
-> Identifying Elliott Waves:
Identifying Elliott Waves is crucial for making important decisions in crypto trading. Crypto algo trading software can help you identify these waves and make decisions accordingly. It is important to identify Elliott Waves if you want to utilize this theory for trading. However, identifying impulse waves is easier than identifying corrective waves.
For a proper understanding of both impulse and corrective waves in EWT, one must have experience and expertise. One should keep in mind rules like wave 2 never retraces wave 1 completely, wave 3 is the longest and so on. One must also identify wave patterns to understand entry and exit points.
For a proper understanding of both impulse and corrective waves in EWT, one must have experience and expertise. One should keep in mind rules like wave 2 never retraces wave 1 completely, wave 3 is the longest and so on. One must also identify wave patterns to understand entry and exit points.
Applying EWT to Forex Trading
Now, that we have discussed a brief understanding of Elliott Wave Theory, we can finally move to discuss the details of applying EWT to your forex trading.
-> Identifying Trend Direction:
The first and foremost important step to applying Elliott Wave Theory in your forex robot for automated trading is to identify the trend direction. To do so, you can follow the EWT. It will help you determine the overall trend of the current forex market.
Once, you identified the current market trend using EWT understand whether it is going to be a reversal of the trend or continuation (based on Elliott Wave Theory).
Once, you identified the current market trend using EWT understand whether it is going to be a reversal of the trend or continuation (based on Elliott Wave Theory).
-> Finding Entry and Exit Points:
Once you have identified the current market trend using EWT, it's time to identify potential entry and exit points at the end of the corrective waves. After identifying the potential entry and exit points place your stop-loss and take-profit orders based on the structure of the wave.
-> Managing Risk:
Elliott Wave Theory does not only help in earning profits on investments. It can also be used for risk management. The wave patterns of EWT can help traders identify entry-exit points and set up support-resistance levels.
-> Combining EWT with Other Technical Indicators:
Combining Elliott Wave Theory with other technical analysis tools can be beneficial. One can use EWT in conjunction with Fibonacci levels, Bollinger Brands and RSI for accuracy.
Limitations of Elliott Wave Theory
Like any other Crypto Algo trading theory, Elliott Wave Theory is not free from limitations. Below, we will discuss some of the most prevalent drawbacks of EWT in detail-
-> Subjectivity in Wave Counting
Elliott Wave Theory strictly follows a selective pattern for wave counting. This plays a crucial role in applying the EWT in forex trading. It requires extensive experience and discipline in application to ensure accuracy.
Therefore, using the Elliott Wave Theory in conjunction with other technical indicators offers more flexibility in building a more effective trading strategy and prevents too much focus on the selective wave counting pattern.
Therefore, using the Elliott Wave Theory in conjunction with other technical indicators offers more flexibility in building a more effective trading strategy and prevents too much focus on the selective wave counting pattern.
-> False Signals
Another essential aspect where Elliott Wave Theory shows significant drawbacks is giving false signals. This means when you apply EWT in your algo trading software it can sometimes give you false signals about the forex market price movement as Elliott Wave Theory solely doesn’t guarantee accurate predictions all the time.
Thus, you must equip your options strategy builder with proper risk mitigation measures according to the changing forex trading market. Also, always backtest your Elliott Wave Theory-based strategies before applying them on live trades.
Thus, you must equip your options strategy builder with proper risk mitigation measures according to the changing forex trading market. Also, always backtest your Elliott Wave Theory-based strategies before applying them on live trades.
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Conclusion
Elliott Wave Theory is one of the most popular and widely trusted technical analysis tools that consists of 5 different wave structures to predict different market moves. Even though it's an old theory it still has significant relevance in forex and other trading.
Above, we have discussed everything you need to know about forex using Elliott Wave Theory which you can also apply in your algo trading software such as SpeedBot.
Above, we have discussed everything you need to know about forex using Elliott Wave Theory which you can also apply in your algo trading software such as SpeedBot.