Technical analysis can be a forex trader’s best friend when it comes to optimizing entry and exit points in the market, but for true devotees of the art, your education is not complete without a healthy dosage of Elliott Wave Theory to bolster your personal level of sophistication when it comes to predicting future price behavior. As when a rock is thrown into a lake, a ripple pattern is obvious, and if the rock is large enough, you can observe a steady progression of declining wave patterns emanating from the original source. In Physics, this phenomenon is known as wave damping. In Elliott Wave Theory, this phenomenon translates into wave counts and Fibonacci retracements.

Currency trading requires the use of technical tools to analyze mountains of data and then present graphical representations of important insights for the trader to assimilate and form judgments in order to form an executable trading strategy. Over time every trader develops his own favorite technical tools, but most of the popular tools are limited in the insights that they provide. Some indicators will announce trends, while oscillators may signal overbought or oversold conditions. Sentiment indicators may also suggest what the trader community thinks of the current market, but none of these will portend the maturity of a trend or a future price target down the road. Elliott Wave Principles are all about when, for how long, and where, the other insights that a trader needs to trade effectively and consistently.

There are five basic ways that Elliott Wave Theory, or its more common name of the Wave Principle, can improve a trader’s performance:

1- Identifies Trends : The Wave Principle can help a trader identify the dominant trend in the market and then plan a high probability trade. Dominant wave trends generally produce a five-wave pattern, while corrective wave trends are typically limited to three waves. Understanding where you are in a major trend allows the trend to be your friend.

2- Identifies Countertrends : Various wave counts following an impulse wave can signal a brief correction in a major trend , thereby allowing the trader to position himself correctly in alignment with the major trend in the market.

3- Determines Maturity of a Trend : Various wave patterns are repetitive in their counts and form on both a small and larger scale. Identifying that you are midway in an upward move is helpful information that allows a winner to keep on running.

4- Provides Price Targets : Elliott took natural law and applied it to market wave action by utilizing the mathematics of the Fibonacci sequence to predict high probability price targets in the future. Waves ebb and flow, and the ratio of impulse to correction typically follow a set of Fibonacci values of 1.618,1.0, 0.618, and 0.382, thereby allowing a trader to set precise profit targets or identify where reversals have a high probability of occurring.

5- Provides Specific Points of Ruin : The Wave principle has a set of rules such that if wave action violates any one of the three, then the trader knows that his operative wave count is incorrect. By restudying the wave pattern at hand, the trader can then anticipate where the trend will break down and then act accordingly.

forex news articles discuss strategies that depend on technical input, whether from pattern recognition, indicator signals, or anticipated fundamental data releases. Elliott Wave Theory expands a trader’s probability for success by augmenting the basic information at hand. The key advantage starts with confirming that you have assessed the correct wave count. Impulse waves always subdivide into five distinct waves, while corrective waves tend to be less energetic, taking longer to form, and overlapping at numerous points. These varying personality types assist with the identification.

Retracements, however, form the basis for many profitable trading strategies because financial markets tend to show an incredible propensity for reversing at certain Fibonacci levels, primarily the big three, 0.382, 0.500, and 0.618. The obvious “bounce back” levels provide high probability trading opportunities, where an adept trader can quickly enter and exit with above average gains. The sequence ordering of the waves also adheres to specific retracements levels, thereby providing more clues regarding future price behavior.

Technical analysis has benefited greatly from the contributions of Ralph Nelson Elliott. Investor psychology does ebb and flow, from optimism to pessimism, to form repetitive patterns that are recognizable and indicative of future pricing movements. Although proponents of the efficient market hypothesis tend to discount any value in technical studies, analysts, traders and investors alike have all profited from the basic principles espoused by the art form. Elliott Wave Theory only expands upon a foundation of pattern recognition and natural law to enable efficiency to a high degree of probability where consistency is the constant objective.