Trading with Elliott Wave can be a confusing concept to understand in Forex trading. For one to evaluate swing trade options in the Forex market they have to forecast continuations or directional vicissitudes for a particular currency pair. The most efficient way to do this is by relying on technical analysis.
Trading with Elliott Wave requires two types of indicators in technical analysis: leading and lagging indicators. The most reliable tool currently used when predicting swings in the Forex market is wave principle analysis. This analysis process can be used to evaluate potential price targets of any specific trend, identify trend exhaustion, identify trend continuation, and identify trends and countertrends seen on the market. Trading with Elliott Wave theories can be applied to both short and long position swing trade currency pairs set ups.
Using the wave principle theory when trading with Elliott Wave, the prices on Spot Forex pairs are a direct result of how investors feel about the current market and what they can do to optimize their earnings. Economy growth or slow down do not play a factor. While it is believed that the mood of investors is more upbeat with a bull market, it is the whole opposite. This upbeat mood of investors is actually what causes the bull market because of this principle.
When trading with Elliott Wave it is important to know the patterns. The patterns of wave principle follow a specific sequence that markets move up in blocks of 3 legs and down in blocks of 2 legs. These blocks of sequences are what form the foundation of the wave principle. Here is a list of leg counts:
Wave 1 – Short Covering
Wave 2 – Pullback from Short Covering
Wave 3 – Major Rally Phase
Wave 4 – Institution Pause in the Rally
Wave 5 – Retail Buying
Wave 1 is the weakest of all these legs in trading with Elliott Wave. It is a short rally stemming from a short covering of a previous leg down. Once this important leg is finished, Wave 2 is created by the sell-off of the currency pair. The end of Wave 2 comes when the market doesn’t create new lows. When this happens you will see dominant reversal patterns which begin in Wave 3.
Wave 3 is the strongest and the longest of all the legs. Forex traders and investors that are trading with Elliott Wave will start making a profit. When this happens, the currency pair will begin to retrace showing the start of Wave 4. Wave 5 is usually supported by retail investors and speculators, not commercial traders and big funds, and is very slow compared to Wave 3. Once the currency pair reaches a new high, the whole leg begins to lose momentum and trends change.
As with any technical forecasting and trading formula, you will not want to use news and you will want to use an indicator as your sole analysis tool. Two main types of leg patterns, pre-trigger and confirming, will also be compulsory when trading with Elliott Wave. Start looking for corrective leg patterns in Forex currency pairs and throughout several different time frames. Use trading software packages that are designed to make trading with Elliott Wave easier and more understandable. Using the wave principle as an analysis tool will increase your understanding and capabilities when it comes to Forex swing trade evaluations.