This is most likely what you’ve been waiting for – drumroll please – applying Elliott Wave Theory to forex trading!
You will be detecting “wave counts” as an Elliott Wave trader.
This means you’ll be identifying the waves to check how they fit to the Elliott Wave pattern in order to forecast future price movement.
In this section, we will examine different setups and use our Elliott Wave expertise to establish entry, stop loss, and exit locations.
Hypothetical, will-most-probably-be-right scenario #1:
Assume you wanted to start your wave count. You can observe that the price appears to have bottomed out and has launched a fresh rising trend.
Using your Elliott Wave understanding, you name the uptrend as Wave 1 and the pullback as Wave 2.
To discover a decent starting place, you return to the School of Pipsology to determine which of the three cardinal rules and guidelines you could use. Here’s what you discovered:
- Rule #2: Wave 2 can never extend past the start of Wave 1.
- Waves 2 and 4 commonly retrace to Fibonacci levels.
So, utilizing your superior Elliott Wave trading abilities, you pull up the Fibonacci tool to determine if the price is at a Fib level.
The price is just chillin’ like ice cream around the 50% mark. This could be the beginning of Wave 3, which is a strong buy signal.
Because you’re a wise forex trader, you also evaluate your stop loss.
Cardinal rule number two stipulates that Wave 2 can never extend beyond the beginning of Wave 1, thus set your stop below the previous lows.
If the price retraces more than 100% of the first wave, your wave count is incorrect.
Let’s wait and see what occurs next.
Your Elliott Wave analysis paid off, and you caught a massive uptrend!
Scenario 2
Let’s use your knowledge of corrective wave patterns this time to snag those pips.
On a downturn, you start counting the waves and see that the ABC corrective waves are moving sideways.
Is this a flat formation in the making? This means that once Wave C concludes, price may simply launch a new impulse wave.
You sell at the market price, trusting your Elliott Wave skills, in the hopes of catching a new impulse wave.
You set your stop just a few pips above the start of Wave 4 in case your wave count is incorrect.
Next Lesson: Forex Market Harmonic Price Patterns