In this video, you will learn about the Elliott wave theory and how you can use it in forex trading. This theory was developed by Ralph Nelson Elliott.
According to this theory, market movements are not random, but repeating patterns called waves. The trends are formed due to the psychology of the market participants. The swings in market psychology related themselves in repeating fractal patterns or waves.
This theory is also similar to Dow theory. However, Elliott theory includes the fractal nature of the market. The market movement consists of impulse waves and the corrective wave. The impulse wave moves in the direction of the trend. The corrective wave moves in the opposite direction of the trend. There are three impulse waves and two corrective waves.
The Elliott wave theory is based on psychology. As you can see, the wave 1, wave 3, and wave 5 are impulse waves. The wave 2 and wave 4 are corrective waves. After wave A, you will start seeing divergence on momentum indicators.
Though the fundamentals are still positive, the wave B is a correction, and a sign of weakness. You can start using technical patterns like the head and shoulders, here. Typically, you look for the break of a neckline for a confirmation for a move to the downside. Wave c indicates the beginning of a bear market.