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# Elliott wave theory predictions

• ## Elliott wave theory predictions

Elliott wave theory is a well-known and widely studied technical analysis by traders in financial markets. This theory was first introduced by someone named On Ralph Nelson Elliott in 1920 through a book published under the title The Wave Principle.

This book describes how to analyze the stock market in his 75 years of experience, combined with evidence to support his theory that markets move in recurring cycles.

Elliott describes the cycle of rising and falling prices called "waves" and explains that these swings occur due to external influences and investor psychology.

Elliott believes the market wave is very unique with its own character.

He concluded that an impulsive wave, which moves along with the main trend, always shows five waves in the pattern.

On a smaller scale, within each impulsive wave, five waves can be found again. And in that smaller pattern, five waves also occur and keep repeating.

## Elliott wave theory analysis explained

Elliott Wave Theory was originally used to analyze stocks, but in its development, it has also been widely used for the analysis of forex and other financial markets.

This theory has become popular since Ralph Nelson Elliott published his book in the title of the book "The Wave Principle".

As previously mentioned, Elliott is of the view that the market seems to be behaving chaotically or erratically, but there is actually a pattern within it which is better known as a fractal.

In his analysis, Elliott found that trading patterns in the market always move in a repeating cycle. As a fractal in one shape, there will be a similar shape with a smaller size than the parent shape.

Based on the theory, the behavior of price swings up and down that occurs because there is a collective psychological collection of market participants and these swings are called 'Waves'.

These wave patterns often repeat themselves and by studying these patterns Elliott claims that Elliott waves can be used to help traders forecast future prices.

For currency or stock or crypto traders, this is quite interesting to learn, any trader will be interested when there is a claim that this method of analysis works well.

Only by studying the wave patterns that are formed with certain principles can traders easily forecast price movements.

## What Is Elliott Wave And How To Use It?

As mentioned earlier, Elliott wave theory uses fractals as the basis for his analysis. Therefore, before learning more about the Elliot wave theory, we must first know what "fractals" are.

Fractals in the world of mathematics are for simulating natural geometric patterns.

Simply put, the fractal is a structure, where every fractional structure still represents the basic properties of a structure as a whole.

For example, one wave goes up and down, in one rising wave there will be a similar wave in a smaller fraction.

In his theory, Elliott places great emphasis on fractals because he states that each Elliott wave can split into a pattern of smaller fractions.

In the real world, you can find fractal patterns for example in the structure of snow crystals.

If the snow crystal is enlarged with a microscope lens, small fractal fragments will appear to form a pattern similar to the overall crystal pattern (self-similar pattern).

Elliott's basic principle is that the market moves in a trend consisting of 5-3 wave patterns.

Where is wave 5 (first phase) after that wave 3 will appear for the next phase

The image below is an illustration of the first wave with a total of 5 waves.

### Psychology behind Elliott wave 5th wave characteristics

• Wave 1: in this wave, the price starts making upward movements. In this phase, market players start to think that the price is at its lowest price, so this is the right time to buy. This causes prices to rise.

• Wave 2: At this point, traders who previously opened buy start to think the price is too high then act to take profits. This condition causes the volume of buyers to decline and prices to fall, but not lower than the previous low.

• Wave 3: When the price has reached the low market participants start to buy and cause the price to rise again. wave 3 is often the longest and strongest wave. This high volume increase could also be due to the influence of fundamental and technical signals that made more market participants buy action. Wave 3 is higher than wave 1

• Wave 4: Similar to the occurrence of wave 2, in wave 4 market participants who have previously opened Buy part of them take profit, because the price has reached its peak. However, some pain traders think that the price is still possible to go up so that the wave tends to be weak.

• Wave 5: According to Elliott's principle this is the last phase in a market trend where the price is too high to buy, and if the trend continues to go up it's just a small spike.

Note that the length of each wave is not always exactly the same as the comparison in the image, it can be longer or shorter, that's natural.

## Elliott Wave Corrective ABC Pattern

As previously explained, Elliott's theory is a 5-3 wave movement pattern. After the first 5 wave phases are perfectly formed, a pattern reversal will occur which is called the ABC corrective wave or Elliott wave corrective patterns.

Look at the illustration below::

The illustration above shows that after wave 5 was formed, there was a decline in buyers which consequently caused the price to fall to a low that was lower than the previous low.

In wave A, it shows that many market players have started to sell after most of the take profits have also affected buyers' weakness.

Wave B shows sellers who take profit and buyers appear trying to raise prices to go up again.

But it turns out that the buyer's strength is no longer possible to lift the price higher, instead the price forms a high that is lower than the previous high at point wave 5.

Elliot stated in his theory that there are 21 corrective ABC patterns, varying from simple to complex. To be able to memorize 21 correction patterns may be quite confusing, but the most basic of these patterns are three basic formations, namely: zigzag, flat, and triangle.

### Zigzag Wave Formation

The zigzag wave pattern is a pattern with steep price movements. Usually, the zigzag pattern will move against the dominant trend with several characteristics of the appearance of this formation:

• B waves usually have the shortest length compared to A and C.

• The zigzag line occurs two or three times in a correction.

### Flat Wave Formation

In this flat pattern, the waves are usually the same length.

Wave B is in the opposite direction to wave A, while wave C will be in the opposite direction to wave B.

This pattern indicates sideways or flat conditions, but in fact, sometimes wave B can be longer than wave A.

### Triangle Wave Formation

The triangle formation is a corrective pattern whose pattern is to form a triangle with price movements limited by the up and down trend lines that are getting closer to form a triangle formation.

The Elliott Wave Triangle consists of five waves labeled a-b-c-d-e. There are rules for the construction and identification of the Elliott Wave triangle.

• The sub-triangle wave divides into 3-3-3-3-3

• The subwave must be a zigzag, multiple zigzags, or triangles

• Wave 'C' cannot move beyond the end price of wave 'A'

• Wave 'D' cannot move beyond the end price of wave 'B'

• Wave 'E' cannot move beyond the end price of wave 'C'

Refers to this rule, the last three waves of the triangle are getting shorter than the previous waves. And if you draw a trend line connecting the extreme waves, that pattern will form a triangle.

Note: All of these waves also apply to a downward trend, you just turn it over. Elliott Wave Theory applies to bullish and bearish markets.

## Three Main  Elliott Wave Theory Rules

Analyzing the market with Elliott waves has certain rules. The most crucial of which are 3 main inviolable rules. Mistakes in making and determining labels may result in imperfect waves based on Elliott wave theory

• Wave 3 never becomes the shortest impulse wave

• Wave 2 never passes the beginning of wave 1

• Wave 4 never intersects the same price area as wave 1

# 3 Waves Fractals

I have already touched on fractals where fractals are parts of a structure that are similar to the whole structure. The fractal theory This also applies to Elliott's wave theory. You will find the smallest 5-3 wave patterns in each wave as a whole.

The image below is an illustration of the Elliott wave fractal:

Look at the picture above where each pattern has a small fraction pattern that is similar to the whole pattern.

From the image above, it has formed a 5-3 pattern with small fractional waves on waves 1, 3, and 5 and there is also a smaller corrective wave pattern on waves 2, and 4.

It is an important note in Elliott's wave theory that in each wave there will be a smaller fraction of the wave with a similar pattern to the whole pattern which is called a fractal.

Because of the fractal pattern, Elliot divides the wave scale from the largest to the smallest to:

• Grand Supercycle

• Supercycle

• Cycle

•  Primary

• Intermediate

• Minor

• Minute

• Minuette

• Sub-Minuette

Generally, traders only use two to three layers of fractals, for example, Intermediate, minor and minute at low timeframes to facilitate the process of reading trading signals.

## How to Use Elliott Wave in Forex Trading?

The Elliott wave theory is a way of doing technical analysis which is complex, there are more than 13 Elliott wave patterns which, if you memorize them, not all traders have good absorption.

But to try it there are 3 easy steps to use Elliott Wave. You can train it using the training method in the following steps.

### Step 1: Identify Starting and End Trends

To fulfill this first step, you must understand the structure of trends in forex, and when a trend ends and when a trend starts. Look at the following picture:

As can be seen in the picture, the rules:

•  If it is an uptrend, the price will cross the Higher High, then continue to move up.

•  If it is downtrend, the price will form Lower High, cross Higher Higher, then continue to decline.

### Step 2: Start Calculating Elliott Wave Starting From Wave 1

The range between HL and the first HH is Wave 1 in an uptrend. While the range between HH and the first LH is Wave 1 in a downtrend. We can only confirm Wave 1, after the price forms Wave 2 with the rule:

• In the uptrend, Wave 2 is unlikely to fall below the beginning of Wave 1. While in the downtrend, Wave 2 is unlikely to surge beyond the beginning of Wave 1.

•  Usually waves 2 and 4 will bounce at the 50% Fibonacci Retracement level.

If later you open a position, the initial position of wave 1 is a realistic value to use as a Stop Loss. Why? because if the price continues to move down, the identification of Wave 1 is wrong and our prediction is wrong.

### Step 3: Trading Using the Elliott Wave Starting Wave 2

Wave 2 is a moment where you can start trading using Elliott Wave. Before that, drag a Fibonacci retracement from the highest level (High) or lowest (Low) on a chart.

Make sure that Wave 1 has been formed, Wave 2 has reached a certain Fibonacci Retracement level (such as Fibonacci 50%) or a Candlestick pattern that indicates a price reversal (eg Engulfing, Harami, Piercing Line, Shooting Star, Dark Cloud Cover, etc.). Open the position at that moment, as in the following picture:

If your prediction is correct, then Wave 3 is a position where you can get the biggest profit, because it is usually the longest compared to the other five waves in the trading system using Elliott Wave.

However, after Wave 3 ends, you can still reap profits from Waves 4 and 5 after the formation is identified.

## Bottom line

Elliott wave theory has rules and principles that should not be ignored when performing analysis based on Elliott waves.

It is very important to maintain the rules that have been set, if the rules in forming patterns are not yet valid or not valid, then it cannot be used as a forecasting theory which provides good accuracy.