This article will contain information about the definition of wave analysis. The history of the appearance of this phenomenon will be affected. The essence and application will be revealed. We’ll also talk about the Elliott method and the Forex market.
How the wave analysis method appeared
Ralph Nelson Elliott is a man who has made a significant contribution to the description of the stock market. Being a person with a mathematical mindset, having rich experience of a successful manager, Elliott was able to summarize information and draw conclusions from it, making practical decisions for the future.
Observing the history of the change in quotations at his disposal, he noticed certain patterns in its development. They were subsequently brought together, resulting in the theory of Wave Analysis. Today, wave analysis has firmly taken its place among the various methods of analysis and forecasting the development of events.
The essence of the wave theory
It is based on the observation that the development of price movements can be divided into certain stages, which successively replace each other. According to the Elliott Wave Theory, there are pulsed and correctional waves. One full wave has eight sub-waves, or waves of a smaller scale. First, a driving one develops, which has three progressive sub-waves separated by two correction ones, then the correction phase begins, which consists of three sub-waves: two progressive and one correction one. Thus, the circle of the full cycle of wave development is closed.
Fibonacci numbers and Elliott Wave Theory
Those who use wave analysis in trading in financial markets are well aware that Elliott laid the basis for forecasting price movements from numbers in the mathematical sequence that Leonardo Pisansky, nicknamed Fibonacci, discovered. In this sequence, each subsequent number is formed by adding the two previous ones. Interestingly, various interpretations of this series of numbers are universally observed in the world around us. Obviously, this is why Elliot applied them in his theory.
Why does it work in financial markets
The wave analysis of the market, whether it is the stock, commodity or foreign exchange market, works on the same principle. Based on the existing picture, forecasts are made of possible scenarios in which Fibonacci numbers are used in literal, but more often in percentage terms.
Thus, wave analysis helps to predict the depth of correction relative to the magnitude of the development of the price movement. If the absolute value of the progressing wave is taken as a unit, then relative to its length, the main correctional zones are equal, roughly speaking, 62%, 50%, 38%. There are also additional zones in 24% and 76%.
When the correction is over, the length of the next progressive wave can be postponed from its endpoint, also using the percentage of Fibonacci numbers: 162%, 262%, 424% ...
Although price movement is not determined by mathematical formulas, the ubiquitous presence of Fibonacci numbers in nature suggested that they be applied to the psychological patterns of behavior of market participants. Therefore, wave analysis and Fibonacci numbers are applied both to the numerical development of the movement of quotes, and to the time waiting for certain prices to reach certain indicators, and in other areas.
Elliott and Forex Method
Today, Forex trading is especially popular, so the wave analysis of currency pairs has its followers and even fans. It has its expression in a number of indicators that are built into the MT4 trading terminal, the most common and popular among non-professional traders.
For example, the above percentages are automatically plotted by the Fibonacci line indicator, and time expectations are plotted on the time zone indicator. Wave analysis in combination with Fibonacci numbers is used in the construction of arcs, fans and extensions.
However, this method also has opponents. The main factor that comes under fire from critics is the subjectivity of the interpretation of existing data. However, it is safe to say that this is also its advantage. As you know, in the financial markets there is no grail precisely because there is more psychology than mathematics. This is an effective method, but it brings a fairly accurate result only after a long improvement.
The main advantage that the market analysis method has, called Wave analysis, is the forecast, which can very likely indicate price goals for which you should be attentive to the price behavior in order to exit or enter a transaction.
When a new tool for trading appears on the financial market, it is easier to apply the existing methods of analysis and forecasting to it than after many years. This is due to the fact that market makers do not yet have much experience in “sweeping tracks” of their activities. Read their intentions helps wave analysis. The dollar-ruble is a relatively young currency pair, because the method proposed by Elliott is quite applicable.