The Elliot Wave Theory is a theory based on fluctuations created by investor and market psychology in foreign currency parities. The awareness of the theory has been increased by Ralph Nelson Elliott in 1938 with the publication of The Wave Principle, which he co-authored with Charles J. Collins. The theory put forward is still valid today. Technical data, government policies, currency, notes, shares, etc. Any financial instrument that might come to mind are metals that can be affected by mass psychology. For this reason, the Elliott Wave Theory is a very important concept for financial markets.
So, how does the Elliott Wave Theory benefit investors in this market? If the investor is good at this theory and prepares himself/herself by exercising enough, he/she can make predictions about the future direction of the market without needing any assistant (indicator) after a while. However, this is a difficult and time-consuming capability. For this, investors have to work hard and have plenty of practice. In this section, you will tell the basics and forms of Elliott Wave Theory. With the information you have found below, you can get rid of a lot of questions about Elliott in your head. This section does not host market samples.
The Logic of Elliott Wave Theory
Elliott is basically the 8 step wave (1,2,3,4,5, A, B, C) theory. According to this wave theory, the market consists of stairs and each wave tries to recover a certain percentage of the previous wave. The most beautiful sentence to summarize this situation is:
Each exit has a landing, every landing has an exit.
Each wave represents a certain group of investors. 1, 2, 3, 5, and B pusher, that is, the bull (called Bulls buying group in financial markets), 2.4, A, Groups. The first image above is a numbered chart for the ascending trend. You can think of the exact opposite of the same graph for the downturn. This time it will be 1,3,5, B bears, 2,4, A, C if the bull will appeal. It has just been stated that each individual is specific to a group of investors. However, each individual has its own unique characteristics. Let’s examine them now:
It’s the starting wave. It is the pioneer in the uptrend trend and the first selling wave in the downward trend. The characteristic of this surgeon is that it usually emerges after the horizon going market trend or starts the first upward trend again after sudden declines. Generally, in the course of the horizontal market, the channel breaks, the upward trend is the upward direction, and the downward trend is the downward trend. In decline trends, the first wave breaking the channel will usually be the first wave.
It is the retreating wave in the upward trend and the repulsive wave in the decreasing trend. The first goal of the second wave is to recover 38.2% of the first wave, 50% of the second target, 61.8% of the third target, and 76.4% of the fourth target. The black striped bar you see below represents the first wave and the yellow striped bar represents the second wave. The numbers are the rates you can easily see with your Fibonacci helper lines, confusing your head. So percentage numbers will be shown in the Fibonacci section. The most important thing to know about the second wave is:
“The second wave will never be able to take back the first waveguide.”
The most important wave in the Elliott Wave Theory can be considered. The longest wave. It gives a strong process signal at the part where it extends from the beginning to the end point of the first wave. It is usually a trendsetter. Most purchases in the uptrend and most sales in the downward trend can be realized in this part. It is a wave that channels can form. On the third wave, the point that needs to be taken is a wave that will quickly travel and draw a lot of bulls and moon in the market suddenly. Moreover, investor psychology is the wave that needs to be paid attention to the most. For example, if we look at the range of the strong process signal in the following illustration, if the second wave is more horizontally followed, the beginning of the third waveguide will be much harder and steep. However, when the first surgeon reaches the end point (upper red line price level), investor psychology will move towards sales and retreat at this point. This is the point of closing the transaction for an investor who has entered the buy-side in the start zone of the third wave. This is in fact preferred by the investor, it can wait without closing the process because when the withdrawal is over, the third wave can continue to travel faster by breaking the first wave endpoint resistance upwards. This market is called “rally”.
The fourth wave is the wave that emerges after the rally on the third wave, the bull on the ascendant on the ascendant, and the resultant retreat of the bears on the downward. It usually consists of horizontal and triangular forms that you have seen in the following way. It is a region that is not recommended for processing. It’s the right zone to get out of the process. It should be noted that the fourth wave, which is important economic data announced in this region, may cause the fifth wave to suddenly start, and this is a signal to enter a good process. Another important point is that the second and fourth waves usually mimic each other.
“The fourth wave never touches the first wave end point.”
The fifth wave may not have as strong a moment as the third wave. After the withdrawal of the fourth wave, it is still a wave of thrust that will be created by investors who are hopeful from the market. As can be seen from the following figure; The first goal of the first, third and fifth waves and the end points of the second and fourth waves can always be a channel. Unfortunately, this can not always be done, but when it does, it can give good processing signals in channeled overflows. The fifth wave can not always exceed the third wave end. It can start up waves back to that point at most. That is why, with the fourth wave, more attention should be paid to economic news and explanations in every subsequent wave.
Some exceptions can occur in the formation of the first five waves. The most common of these are the expansions. If the market rises from the first and second wave, steep and steep ascents and falls horizontally and rises and falls, the channel forms without the third wave, as seen below; First to fifth, and second to fourth waves.
The channel lines you have seen above are not necessarily parallel to each other. This channel could also have a conical shape. The position of the channel lines relative to each other will affect the amplitudes and hard outputs of the waves. Apart from that, the first 5 waves we left behind have a structure that can continuously create 5, 5, 5, 5, 3, 5 wave systems.
Now that the hopes are over, it’s time for a trick that could lead many people to lose money on the market, namely A, B, C waves. It is important to pay attention to these three waves because there are some confusing movements of the waves A, B, C as well as the obvious characteristics of the first five.
Some investor types are positioned more quickly than economic indicators and market movements. These investors, who are the precursors of waves A, B, C, show correction in wave C, that is, retraction while in wave B, It is also possible to see the above mentioned 5,3,5 system in these waves. An example is shown below.
We can live in waves A, B, C, which we have encountered on the fifth wave. More in line with developments in the economic news; A, C waves can reach the same level. For example, in the downward trend, when the A wave ends and the B wave starts, the end point of the B wave can reach the starting point of the A wave, the starting point of the C point. In this case, a horizontal image is formed.
As can be seen from the picture above, the B wave in some cases shows a reverse reaction and overcomes the horizontal channel to form the 3,3,5 wave form. In some cases, as can be seen in the figure below, the end point of the third waveguide with wave B may provide symmetry to the head shoulder to shoulder or reverse shoulder head shoulder farming. In this case, the C wave signals a strong signal at the price point of the channel.
Another waveform is A, B, C, D, E waveform. In some cases, according to economic explanations and market observations, A, B, C may expand to form extensions like D and E, as shown below, and consequently, a conical channel is formed. In such cases, the waves from the channel give strong process signals.