Forex Trading - The Elliot's Waves Theory

A lot of trading gurus have made their contribution, one way or another, to the way we do trading today. One valuable tool that was contributed by one trading guru Ralph Nelson Elliot is the 5-3 wave. According to him, the seemingly chaotic way that the stock markets behave is really not so. There are actually patterns that can be formed from the fluctuations that the erratic behavior of the market shows. At any point, there are repetitive patterns that could be observed which Elliot called waves. In his Elliot Wave Theory, Elliot explained that these waves are representations of patterns formed by the upward and downward swings of how traders actually respond to the market.

While the Elliot Wave Theory was originally formulated based on the stock market, the theory also applies to forex trading. The 5-3 wave pattern illustrates how a trending market moves. The pattern is made of impulse waves and corrective waves. The initial 5-wave pattern shows how the market makes its initial move upwards, and then moves back down when the people in the original wave decide to take profits owing to the perception of the stock being overvalued. This will move back up again way before it reaches its initial low as people sees the stock as something of a bargain again. This is followed by a long and strong wave when the stock catches the attention of traders who develop interest in the stock. At a point when people consider the stock expensive again, the wave weakens and take another dip only to move back up again for one reason or another.

Using the Elliot Wave Theory as a trending indicator in forex trading is one of the most commonly practices. Great forex trading profits can be taken from catching the waves at just the right time and riding the dips to wait out the right timing to cash in.