Elliot wave theory In Foreign Coin Exchange

The Elliot wave theory in foreign coin exchange is comprised of derived rules that determine the changes in the forex market. The theory of Elliot waves was developed keeping in mind the trends of the biggest liquid financial market that is foreign exchange market. And these market movements are called waves and these are fractal in nature.

Understanding the Elliot wave principles brings the sense of historical perspective to the investor. Market never goes in one direction and that makes the theory of Elliot waves a good forex market forecasting tool.

The Elliot waves tell us about the ascending and descending of waves in the history of the market movement. The Elliot wave principle is a kind of technical analysis of the activities taking place in the market of foreign exchange. The concept was developed by an accountant Ralph Nelson Elliot unfolding the pattern which the market prices followed. Theory of Elliot waves helps predict the trends in the forex market.

Basics of Elliot wave theory defines that the market movement is made up of cycles that contains eight waves each. These eight waves are further divided in a five is to three ratio. The five waves are found to be in the direction of the trend at one larger scale and three waves are found to be against that trend. The waves being fractal in nature implies that market structures are built from similar larger or smaller structures.

The upward movement of five waves as a whole is referred to as the impulse wave and the three-wave countertrend movement is described as a corrective wave with sub waves labeled with letters. So depending upon these two wave groups, the theory of Elliot waves is divided into two patterns- the impulse pattern and the corrective pattern.

The impulse pattern in the basics of Elliot wave theory tells that the five waves in the impulse pattern are numbered as one to five and each number represents a group of traders. The 5-3 move becomes two subdivisions of the next higher 5-3 wave. The underlying 5-3 pattern remains constant, though the time span of each may vary. The impulses creating a directed trend make the market move very actively.

The corrective process in Elliot wave principles comes in two styles, the sharp corrections and the sideways corrections. Specifically the corrective patterns are categorized into four main patterns and these are, zigzags, flats, double three and triple three.

Wave Categories

The Elliott Wave Theory assigns a series of categories to the waves from largest to smallest. They are:

• Grand Supercycle
• Supercycle
• Cycle
• Primary
• Intermediate
• Minor
• Minute
• Minuette
• Sub-Minuette

Depending upon the market trend the investor can identify itself in terms of wave count. And for the count there are specific rules like

• Wave 2 should not break below the beginning of Wave 1;
• Wave 3 should not be the shortest wave among Wave 1, 3 and 5;
• Wave 4 should not overlap with Wave 1, except for wave 1, 5, a or c of a higher degree.
• Rule of Alternation : Wave 2 and 4 should unfold in two different wave forms Elliott Wave Theory and Fibonacci Numbers

The Elliot wave theory was developed on the foundation of Fibonacci numbers. The complete market cycles described by the Elliot wave principles are constructed with the help of Fibonacci numbers. The cycles Elliot defined are comprised of wave counts that fall within a Fibonacci sequence. The principles of Elliot wave in foreign coin exchange when applied to the Fibonacci constants, it was found that Fibonacci relationships are evident in corrective patterns internally as well as externally too.

After the Elliot wave principles, software was developed, which works on the basis of theory of Elliot waves and scans for the trades on completed patterns. To correctly analyze the Elliot waves there are two important factors, correct labeling and the counting of waves will bring the accurate forecast of market.