Elliott Wave is a great trading tool for trading trends. Elliott Wave is meant to put the current move of the market in context for you, the trader. Putting the market in context for you is of great help. For starters, if you know a market that has recently been in a strong trend is correcting, you can look for a resumption of the prior trend to enter at a favorable price. Also, you can look to see if the pattern is starting to break down to see if the prior trend has exhausted itself, and look to either take profits or enter a new trade in the direction of the new trend.
Courtesy of Daily Trading Course. The picture above is a mock-up that shows the progression of markets as seen in Elliott Wave.
As you can see, the market is often broken up by strong trends and minor moves against the trend. The with-trend moves are known as impulse or motive waves and the counter trend moves are known as correction. Another key aspect of Elliott Wave is that trends are fractal. Simply put, that means that each impulsive wave can be broken down into 5 smaller waves and each correction can be broken into 3 smaller segments of a counter-trend move. As illustrated above, the trend or impulse unfolds in 5-waves whereas corrections unfold often in a 3-wave pattern.
Furthermore, in understanding the basic 5-wave impulse or trend, you can be on the lookout for a 3-wave correction or developing correction. The purpose of looking for a correction is that as the trend resumes, you can look for the correction to be losing steam so that you can enter at a good price.
What many traders who are unfamiliar with Elliott wave often end up doing is chasing the price or enter on the extension of the trend right before the correction begins. This causes them to get stopped out because they did not understand the context of the market and current trend when they entered the trade. When looking at the 5-wave pattern and 3-wave correction to get context, you can see how the breaking down of GBPUSD has us looking for a correction to continue.
Once this corrective move to the downside completes, then I can look for a buy on a resumption of the overall trend to higher prices. That will help you grab a context of the current market so that you can look for the maturity of the current trend or ideally the exhaustion of the correction. In other words, the reason why Elliott Wave traders often utilize Elliott Wave is because you can have definitive levels as to where the correction may end with Fibonacci Retracements.
Furthermore, you can have price objectives by utilizing the Fibonacci Expansion tool. One key thing to note when utilizing Fibonacci retracements within Elliott Wave is that there are levels to watch out for but rarely a level that the market must hit.
Therefore, you want to focus on price action near levels like the If you see a lack of conviction past these levels then you can look to a resumption of the overall trend off of these levels. In terms of price objectives, you can use the Fibonacci expansion tool. The expansion tool takes three points on the chart to project the exhaustion of the next impulse.
The most-commonly used targets are the This simply means that this impulse is either Elliott can be a headache if you worry about labeling every wave and every correction.
In other words, are we in an impulse or a correction? To contact Tyler, email tyell dailyfx. DailyFX provides forex news and technical analysis on the trends that influence the global currency markets. Click here to dismiss. Foundations of Technical Analysis: Classic Chart Patterns, Part I.
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