The Wave Principal Basics

Traders use several indicators to monitor the market’s trend and determine when to enter or exit a position. These indicators and patterns help traders describe the financial market’s price movements. And one of the most reliable technical analysis tools investors have used for years is the wave principal.

The Elliott wave principal focuses on recurrent long-term patterns related to changes in the trader’s psychology and sentiment. These waves can be easily identified in consumer behavior and stock price movements.

Therefore, investors can easily profit from the market’s trend by simply riding the wave. They should also know when it’s about to end and exit their positions. The xBrat Elliott Wave Trading Indicator for many different platforms make slight work of Elliott Wave Trading. Check it out HERE

elliott wave

Elliott and The Wave Principal

The wave principal was named after Ralph Nelson Elliott, a renowned American author and accountant.

In fact, Ralph Nelson was inspired by his observation of the stock market and the Dow Theory. He concluded that identifying a repetitive wave pattern could easily predict the stock market’s movement.

Ralph analyzed the stock market for years and identified certain unique wave patterns. He even managed to make several predictions based on these wave patterns. Ralph based a certain percentage of his work on the Dow Theory, which helps with defining price movement.

After more research and discovery of the nature of the price action, he published his first book, “The Wave Principle.”

Impulsive VS Corrective

According to the Elliott wave theory crypto, the impulse wave moves in the trend’s direction while corrective waves move against the trend. The movement in the trend’s direction usually unfolds in 5 waves (impulsive) if it respects the Elliott wave rules.

On the other hand, the correction usually includes 3 waves (corrective) at a larger degree.

Generally, about 75% of the time, a corrective move follows an impulsive move. The corrective move can be horizontal and move against the trend or in the same direction. This also applies to corrective moves since they’re followed by an impulsive move about 75% of the time.

Ending VS Leading Diagonals

Most of the time, we expect waves 1 or 5 to form as an impulse. But at times, we may end up seeing a 5-wave pattern overlapping waves 1 and 4. When this happens, it means we are about to have an ending or leading diagonal.

But what’s the difference between leading and ending diagonals? Well, the leading diagonal tends to form in wave A of zigzags or the first wave of the impulse waves. Leading diagonals mark the start of a zigzag or impulse.

According to Elliott wave International, the ending diagonals form in wave C (zigzag) or wave 5 (impulse wave).

Trendlines and Channeling

When analyzing a chart, traders can apply several trendlines. They use the trendlines to connect the lows for a period, and a second one links the highs creating a channel. Channels tend to create a unique visual representation of resistance and support for the period you’re analyzing.

Like with a single trendline, investors always look for breakouts or spikes that can move the price beyond the channel. The price movement outside the channel can serve as an entry or exit point, depending on how you have set up your trade.

The main limitation of the trendline is that you have to readjust its position as more data comes in.

Divergence and Indicators

Another method traders use to detect a weakening price trend is divergence. Generally, divergence occurs when the price moves in the opposite direction of the technical indicators. The divergence informs the trader when the trend starts weakening or is about to change direction.

Generally, there are two types of divergence (negative and positive divergence). The negative divergence warns us when the price is moving lower. It occurs when the price moves higher while the indicator moves higher. When used correctly, the divergence can improve the Elliott wave success rate.

On the other hand, positive divergence shows that a price can move higher. This occurs when the technical indicators are moving higher while the price is moving lower.

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