Traders have used the Elliott theory for decades to profit from the market trend.
What Is the Elliott Wave Theory?
The Elliott principle is a unique technical analysis theory that investors use to describe the price movement in financial markets. Ralph Elliott created this theory in the 1930s after identifying some recurring, fractal wave patterns.
This principle helps investors identify all corrective waves opposing huge trends. It also helps identify impulse waves that set up patterns.
How Does Elliott Wave Theory Works?
Basically, this theory claims that you can predict price movements since they move in a repeating down-and-up pattern known as waves. These waves are the outcome of the traders’ sentiments or psychology.
The Elliott theory identifies two waves: corrective and impulse waves. Like most techniques, the Elliott wave principle is subjective, so traders won’t interpret it similarly. They won’t all agree that it’s an effective trading technique.
By itself, this theory is not that effective. So you have to use it with other tools, the most popular combination being the Elliott wave theory fibonacci.
How Do You Trade Using ElliottWave Theory?
The impulse wave comprises 5 sub-waves that create a net movement in a certain direction as the market’s trend. Two of them are corrective, while the three are motive waves and labeled as 5-3-5-3-5 structures.
For it to be a perfect wave, then the second sub-wave can’t retract 100%. On the other hand, the third one can’t be shorter than the 1st and 5th.
Therefore, if you notice your trade moving upwards, creating an impulse wave, you can go long on the shares. You can ride the wave until it creates the 5th sub-wave before anticipating a reversal. And if it happens, then you can go short on the stock.
The corrective waves are composed of three sub-waves making net movement in the opposite direction. So you can ride these corrective waves until the end and make some profits. Therefore, the Elliottwave theory can help you earn even when it retracts.