Elliot Waves A Great Tool In Forex Trading

One of the most important characteristics of the Forex markets is that they have the largest volume of trades per day among all the capital markets you can opt to trade. This characteristic along with it’s high leverage and around the clock trading schedule makes Forex a very attractive activity with a huge profitability potential.

The forex markets have an additional characteristic that makes them “easy” to trade compared to other markets. Very often they develop strong trends that seem to follow a repetitive pattern in all the different time frames you can use to analyze the market conditions.

Ralph Nelson Elliot observed this patterns and after analyzing a great number of charts he discovered in the late 1920’s that the markets move in a repetitive manner that is too far from being a simple chaotic behavior. He discovered that the markets move in cycles and that they reflect the mass psychology of the active elements participating in them, with characteristic “waves” representing this active elements psychology in their daily encounters with the markets.

Elliot not only discovered the repetitive nature of the markets cycles represented by the waves but he also realized that this patterns had a fractal nature. This means that the patterns not only repeated with time but that in a given fixed period of time the characteristic wave pattern would repeat at different time scales (days, hours, minutes).

The Elliot wave pattern is divided into five constitutive waves: the first of the waves is called the impulsive wave. The fractal nature if this waves was evident to Elliot when he observed that in every impulsive wave he analyzed, when observed at a smaller time scale he would find the characteristic five waves of the pattern he had found and if he now looked at the impulsive wave of the smaller impulsive waves in an even smaller scale he would find again five ways, etc.

Elliot waves are very important in Forex trading because considering the repetitive nature of this patterns you can make a pretty accurate forecast of what the markets will do next giving you a huge advantage over other forex traders without this great trading tool.

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Written By: Adrian Pablo