Eliot waves are one of the factors of technical analysis that is used by many traders, because it allows you to clearly determine the time to enter and exit the market.
The theory of Eliot’s waves is that the market is constantly in motion, with each movement consisting of five pulsed and three correctional waves. Pulse waves correspond to the main direction of price movement – the trend, while corrective waves determine the direction of movement against the trend, which can be either a manifestation of correction or a sign of a change in the direction of further movement.
The essence of the theory is that any wave consists of smaller waves, five of which are pulsed, and three are corrective. Thus, waves on a larger timeframe can always be decomposed into smaller components, if we consider them for a shorter time interval.
Theory and Practice of Eliot Waves
The theory of Eliot waves seems simple enough, but it is necessary to take into account certain factors in its practical application. So, it should be understood that the waves are not always clearly visualized on the graph, they can have different duration and amplitude, therefore, to correctly determine the time to enter the market, it is necessary to clearly define the wave and its direction.
To do this, note that: – the third impulse wave is often the longest and will never be the shortest; – the first and second waves can be short and small in amplitude, they correspond to the Dow accumulation stage, these waves are often difficult to determine in the graph; – the fifth impulse wave is often shorter than the third, but two are the basis of any trend; – to determine the wave should be borne in mind that the price range of the 1st and 4th waves almost never overlaps.
Eliot Wave Indicator
The Eliot Wave Indicator is a technical analysis tool that is based on the fact that each wave in the classic is a certain amount from the previous wave. Of course, this is not always the case on the chart, but building an indicator based on classical values allows to obtain an approximate price movement, which gives an idea of the direction of movement of the chart, the time it starts and ends. Due to this, the Eliot indicator can be the basis of a trading strategy, but it is often still used in conjunction with other elements of technical analysis.