subject: An Elliott Wave Trading Strategy [print this page] Elliott Wave Principle was first discovered by a stock trader R.N Elliott in 1930s who found a certain wave pattern to be repeated over and over again in the stock market. Today, this is considered to be a universal law of the market that is applicable to all the markets including the forex market.
Price action can be divided into tends and corrections or sideways movements. Elliott Waves Theory stipulates that markets move in repetitive patterns. There is always a five wave advance ( impulse waves) and a three wave decline (corrective waves). Waves 1, 3 and 5 are the impulse waves, wave 3 being the longest. Waves 2 and 4 are the corrective waves. These impulse waves are the trends in the market and the corrective waves are the sideway movements in the market.
You can observe these wave patterns on all timeframes and within one wave you can further subdivide it into smaller patterns.
Now in this simple forex trading strategy we will combine the above basic knowledge about Elliott Waves with three Elliott Wave Indicators. Combining these principles with Elliott Wave Indicators gives you a powerful and a unique trading method that can be highly profitable yet easy to master.
On most of the charting software, you can find these three Elliott Wave Indicators.
1. Elliott Wave Trend (ET)
2. Elliott Wave Number (EN)
3. Elliott Wave Oscillator (EWO)
Now, ET tells about the trend direction while EN tells about the wave number and EWO measures the momentum. When you find, EN either 3 or 5, ET either 0 or 1 and EWO above 0, enter into a long position and exit when EWO becomes negative.
And these are the rules for going short: EN should be 4. ET should be 0 or -1 and EWO should be a negative number. These three things must happen at the same time. Exit your position when EWO becomes positive.
You can use this Elliot Wave Trading Strategy on stocks as well as on commodities. This strategy can be used on smaller timeframes like the 5 minute charts as well as on longer timeframes. Good Luck!
by: Ahmad Hassam
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