Forex

When evaluating the forex market for swing trade opportunities the focus is placed on predicting directional changes or continuations for a given currency pair. For this we rely on technical analysis.

In technical analysis, just as in fundamental analysis, there are lagging indicators and leading indicators. One of the most reliable tools used to predict forex market swings is Elliott Wave analysis. Elliott Wave analysis can be used to identify trends and countertrends, trend continuation or exhaustion and to evaluate the potential price targets of a trend.

You can apply Elliott Wave analysis to both long and short position swing trade set ups for your currency pairs.

Elliott Wave theory is named after Ralph Nelson Elliott, who concluded that the markets moved in a repetitive pattern of waves. He attributed this action to the mass psychology of the market.

Elliott concluded that the market¡¯s movement was a direct result of the mass psychology of the time and that the stock market is a fractal. A fractal is an object that is similar in shape, but at different scales. A great example of a fractal in nature is a stalk of broccoli. The stalk and the individual branches look exactly the same; just the branches are smaller in scale.

Fractals just happen to form in accordance with Fibonacci ratios. Is this a coincidence?

Elliott attributes this mass psychological move to the human trait of herding. Even though Elliott¡¯s theories were based on stock market price movements, it has been applied to evaluating Presidential approval ratings and fashion trends changes as well.

The conclusion, the market price actions are not the cause of economic growth or slow down, but the reflection of the mass psychology of investors. If the mood of the investing public is upbeat then a bull market ensues. This is counter to what most individual perceive, that because there is a bull market the mood of the investing public is upbeat.

Elliott Wave patterns follow a sequence that the markets move up in a series of 3 waves and down in a series of 2 waves. This 3 wave impulse and 2 wave corrective sequence form the foundation of the 5 Wave impulse pattern (the opposite is true in a downtrend).

The Elliott Wave Counts are as follows;

Wave 1 - Short Covering
Wave 2 - Pullback from Short Covering
Wave 3 - Major Rally Phase
Wave 4 - Institution Pause in the Rally
Wave 5 - Retail Buying