Trading System Based on The Elliott Wave Theory
June 17, 2019
Elliott Wave method
quickly became one of the favorite ways to trade financial markets due to the
concept’s simplicity and effectiveness. Ralph Elliott built a Forex trading system that
asks traders to answer a simple question: is a market move an impulsive or a
What is an Impulsive Wave?
called a five-wave structure, an impulsive wave is labeled by traders with
numbers: 1-2-3-4-5. Out of the five waves, the second and the fourth ones are
corrective, while the other waves are impulsive on their own.
3rd wave cannot be the shortest among the impulsive waves, nor the
second wave can retrace beyond the start of the 1st wave. Moreover,
at least one wave must extend, and Elliott defined an extension as minimum
161.8% when compared with the next longest wave in the structure.
Types of Impulsive Waves
on the extended wave, multiple types of impulsive waves exist. In the order of
their occurrence, here are the three types:
- third wave extension
- the third wave is the longest in the
structure, and typically is longer than 161.8% of the previous first wave
- first wave extension
- the first wave is the longest in the
structure and exceeds 161.8% of the third wave’s length
- fifth wave extension
- the fifth wave is the longest and exceeds
161.8% of the third wave’s length
on the type of the impulsive wave, traders have a different trading strategy, setting
the take-profit and stop-loss orders accordingly.
What is a Corrective Wave?
to the Elliott Wave Theory, a corrective wave is labeled with letters. It is
said that any corrective wave is a three-wave structure, despite the fact that
most of the corrections have a complex, rather than a simple structure.
Therefore, the standard labeling of a corrective wave is a-b-c.
waves are extremely common on the Forex market. As a matter of fact, the market spends most of the
times in consolidation, struggling to trend from time to time. Over sixty-five
percent of the time the Forex
market spends consolidating, so traders looking for sharp trends will be
disappointed. Therefore, understanding corrective waves under the Elliott Wave method is
crucial when trading
the currency market.
of any Forex broker
trading educational materials, corrective waves under the Elliott Theory are
either simple or complex:
- simple corrections
- a-b-c structures, with waves a and b
corrective, and the c-wave impulsive
- a-b-c structures, with waves a and c
impulsive, and the b-wave corrective
- a-b-c-d-e structures, with all waves
- complex corrections
- corrections with a small x-wave
- double and triple combinations
- double and triple zigzags
- corrections with a large x-wave
- double and triple three combinations
mastering impulsive and corrective waves, holds the “secret of the universe” as
Ralph Elliott said in the 1930’s. This is especially important for today’s Forex trader, as the
opportunities in the currency market allow for quick and impressive profits.