Part 1: Introduction to Elliott Wave Theory : By Julie H. Julie Is an ex professional bank forex trader. Along with her husband Jay they have over 25 years experience trading forex at the highest level. They are also regular contributors to the forex mentor site where this article first appeared and in the forum attached to this site.


The first of a series of articles that covers a brief history of Elliott Wave Theory, what it is and measures, and what it can tell you about the market that is useful in price forecasting.


This article/series is intended to show you how experienced traders can use more sophisticated methods to try & analyse movements in the forex markets. If you are new or have not yet mastered my methods DO NOT get distracted or confused by this.



I have been trading for over 6 years and I do not understand it fully! This will be here later for you to come back & refer to when you are ready. Remember our mentality is K.I.S.S - KEEP IT SIMPLE


Elliott Wave Theory was derived from the principles of psychologically-based market price action originally discovered by Ralph Nelson Elliott and published in his seminal book “The Wave Principle” in 1938. In its present formulation, Elliott’s original ideas have since been expanded upon by notable present-day Elliotticians like Robert Prechter, A. J. Frost and Dave Allman whose primary focus is on forecasting stock market prices.


Nevertheless, any market with largely-unregulated prices and in which human psychology plays a key part in the determination of prices tends to demonstrate the fundamental principles of Elliott Wave Theory. For example, this phenomenon is widely observed to be true of the forex, futures and commodities markets that each provides interesting strategic trading opportunities for personal traders managing their own accounts.
As applied to the price action observed in financial markets, Elliott Wave Theory involves performing a meticulous and ongoing analysis of how mass psychology alternates between periods of bullishness and bearishness.


According to the Theory, the resulting price patterns created by fluctuating public opinion tend to take on the appearance of waves of varying smaller degrees that are repeated in larger cycles. Furthermore, these waves demonstrate specific common behaviors, follow certain rules and have probabilistically-quantifiable price objectives. All of this information can be very useful when one is attempting to forecast longer-term market price action.


Specifically, Elliott Wave Theory proposes a series of five waves to any upward or downward market move or trend that are customarily numbered as Waves 1, 2, 3, 4 and 5. Three of them, Waves 1, 3 and 5, are movements or “impulses” in the direction of the trend. These waves are interrupted by two counter-trend movements or “corrections” which are know as Waves 2 and 4. Once Wave 5 of the cycle is completed, the overall move then corrects itself in three waves that are known as the A, B and C waves and which collectively result in the price action having moved against the preceding trend.



Refer to Diagram 1 for a pictorial example of a theoretical Elliott Wave pattern along with the traditional numbering of waves in the classic eight-wave sequence.


Elliott Wave Theory
Diagram 1: A Classic Elliott Wave Pattern
Basically, by correctly assessing the location of the market in terms of the overall wave cycle that is presently unfolding, a technical analyst well-versed in using the techniques of Elliott Wave Theory can probabilistically foresee what the market is likely to do in the near and even in the relatively distant future. Not only would such an analyst be able to forecast the direction of the upcoming price move with reasonable accuracy, but in many cases, they would also be able to determine the likely extent of that move, as well as whether the market might dip before rising, for example.


While this might make Elliott Wave Theory sound like the Holy Grail of technical price forecasting, using it in practice has some considerable shortcomings. For example, the key to obtaining accurate market price and timing predictions using the Theory is to have been skillful enough to have grasped the correct location of the market in the prevailing market cycle.


Furthermore, since Elliotticians first observe price action and then “count” waves in order to determine where the market might be trading in its larger cycle, this is often referred to as their “wave count.”



Unfortunately, while the true wave count of a market might be quite clearly apparent in hindsight when reviewing historical price data, it often can only be guessed at in the present moment. As a result, this wave count uncertainty presents the most critical problem facing the technical analyst wishing to use Elliott Wave Theory to forecast price movements.


Nevertheless, if one is willing to trade not on certainties, but instead on reasonable probabilistic assessments of what the most likely wave count scenario is, then performing an Elliott Wave analysis can be a useful trading tool for performing market forecasts on a variety of time frames and can give a trader useful information that they could not otherwise hope to attain from any other analytic techniques.



Many people are also not even aware that they are already using an aspect of Elliott Wave analysis when they use Fibonacci retracement levels to determine likely correction targets.


The forthcoming series on Elliott Wave Theory will go into greater depth about the basic elements involved in an Elliott Wave analysis. It will also cover the psychological aspects that characterize markets depending on what wave of the larger cycle they are in, how impulses and corrections are analyzed, why and how Fibonacci numbers are used in Elliott Wave analysis, and how this unique type of technical analysis can be used to help you forecast markets prices and obtain profitable trading opportunities.


This article first appeared in the low cost forex mentor pro site that I run. Here we have lots of mini videos to teach you how to trade forex (beginners through to intermediate level) as well as articles, tips & support. I also post analysis EVERY EVENING for the day ahead. What I am looking to trade. Where & why. To find out more click on the banner below: