Elliott waves are one of the few studies that can determine where the market at the moment, where it is likely to go next and, of course, what opportunities there are for traders in it.
Nevertheless, it is no secret that for many traders, the Elliott wave theory is one of the most difficult studies to understand, which can be used or followed by someone's forecast. Now we will find out why.
The idea of the Elliott wave indicator
Elliott Waves were introduced by Ralph Nelson Elliott in 1930 for trading on the stock market.
The theory is based solely on the phenomenon of mass psychology, which most likely determines the outcome of market behavior.
Mass behavior generates market behavior
Among the traders who use the Elliott wave theory in their trading, there are many technical analysts of banks and leading top-level investment institutions. They use the knowledge of Elliott wave principles to understand the behavior of the masses of investors and thereby make predictions about the behavior of the market.
Polar opinions on the Elliott wave theory
There is a huge degree of subjectivity in Elliott waves. If you ask a group of traders who trade using Elliott waves to show Elliott waves on the same chart, they will most likely show you several different wave models.
Elliott waves have a huge set patterns and rules.
In the Eliot wave theory, there are only 3 rigid, unshakable rules, while the rest of the rules can be changed, excluded and invalidated, which provides the trader with endless opportunities.
The key to trading on Elliott waves is not to always correctly identify the waves, but to find ways to minimize losses as much as possible if you have identified them incorrectly. Nevertheless, there are certain small windows in each price movement that promise to bring a certain amount of profit regardless of the calculation of the actual wave, as long as its direction is known – this is the essence of the Elliott wave theory.
Using Eliot waves, traders look for entry points that are close to the levels support and resistance. And, if the level is broken, traders exit the market with minimal losses, and this wave pattern will be considered invalid. However, if the definition of the wave pattern was correct, they will receive a profit that is two to five times higher than the risks.
Learn more about Eliot Waves
- Fundamentals of Elliott waves