Applying the wave principle on the market, a trader can give an accurate forecast of the price behavior at a certain period. This type of market analysis can ensure success in trading and can prove to be a really effective tool for a professional trader.
According to the Elliott Wave Theory, a price movement of any currency pair can be depicted on a chart in the form of waves. Waves are divided into three impulse waves that go with a trend and two corrective ways that move in the opposite direction. These waves are labeled with the numbers 1,2,3,4,5. When the trend formation becomes less active, the price correction starts that is depicted by three waves on a chart. Two of these waves are impulsive and the third one is corrective. These ways are labeled as A,B, and C.
The main idea of the wave analysis is that the price movement is regular; one and the same pattern repeats itself over and over again. When traders apply the wave analysis on Forex, they can foresee the price movement at a certain stage of the trend. If traders enter the market on the right wave and close a deal in time, they can make a profit. To reduce losses on Forex and set a stop loss level correctly, traders should pay attention to the length of the waves. As a rule, the longer the impulsive waves are, the longer the corrective waves will be.
The most difficult thing in applying the wave analysis is to define the type of a wave correctly. In order to give an accurate forecast of the price movement, it is necessary to tell apart the impulsive and the corrective waves. Usually, the corrective waves are the hardest to recognize. The Elliott Wave theory is applicable to any traded asset – from shares and bonds to the EUR/USD currency pair.