Elliott’s wave theory revolves around human psychology. In this theory, the effective masses are caused by trending market moves known as the five and three patterns. The first phase of these waves is known as the primary trend, while the second three phases are known as the counter. The Elliot theory was started by an American accountant known as the Nelson Elliot’s.
The main aim of this theory was to allow investors to get the impending reversal points. A forex trader can be able to place their sell and buy orders and even make profits when the market forms a bottom and a top. Therefore, by identifying the prices repeating processes correctly, the trader can easily predict where the prices will move next.
Steps of trading Elliot’s waves
Step 1: Identify the start and the end of the trend
For you to find out the starting and the endpoints of the trend, you must know the trends structure. It might look complicated at first, but it’s very simple since it’s all about finding the resistance and the support levels that will be broken by the market uptrend’s and downtrends.
To help you in determining the trend better, wait for the price to hit the support and resistance levels. Start the counting as prices move up and down. The retracements levels and Fibonacci extensions will also help you to get the Eliot wave counts.
Step 2: start counting 1
The first wave count is very crucial because everything starts from there. The wave happens due to trend lines, support and resistance levels, and price channels. Note that you cannot trade the first wave. You can, however, trade the wave move by using the trend line forex trading strategy method. You can start adding other position to the first wave when the second wave begins to form. The technique is similar to the pyramid trading technique.
Step 3: start counting the waves to prepare for the actual trading
In this step, start counting the wave 2 as you prepare for your Elliot wave theory first trade. The best Fibonacci retrenchment levels to either buy or sell 50% and 61.8% respectively. In addition to that, you will have to be conversant with the reversal candlestick patterns to confirm your trade setups on the Fibonacci levels.
Step 4: start counting wave 3 and watch as your profits increase
Wave three starts at step 4. There nothing much to do in this step other than to watch as your trading profits increase. If you make accurate predictions, you will make the most profits in this step.
Step 5: start the wave 4 as you prepare for your trade.
You start counting wave 4 at the beginning of step 5. Assuming that everything goes on well as per your predictions, this is where you should enter the 2nd trade according to the Elliot wave theory.
Just like in step 3:
- Use the reversal candlesticks to determine your trade entry
- Use the Fibonacci retrenchment levels 61.8%, 50% or 38.2 to find the potential turning points.
- You can also combine or use the trend line trading strategy to know when the price hits the headline.
Step 6: start the wave 5 counts and start taking profits
At this step, you will start making trading profits off the table. You will also most of your trading positions in this stage and leave only a few running. Use the trailing stop loss technique to lock out your profits. You can also forget about the ABC trading waves if you have made gains in both wave 3 and wave 5.
The Elliot wave theory is quite complex, and we have only covered the basics and not everything in this write-up. In simple terms, the Elliot theory only explains the support and resistance theory. If you understand the Fibonacci retracements, bullish and bearish markets, as well as the support and resistance levels, you will find the Elliot wave theory trading interesting.