The Elliott Waves

The Elliott Waves Theory is a popular technical analysis tool used in the foreign exchange market to identify potential trends and reversals. This theory is based on the concept that the price of a currency pair moves in a series of waves, and each wave has a specific structure and pattern.

The Elliott Waves Theory identifies two types of waves:

Impulse Waves: Impulse waves are the larger waves that move in the direction of the trend. There are five impulse waves in an uptrend and five impulse waves in a downtrend. Each impulse wave is made up of smaller sub-waves, labeled 1, 2, 3, 4, and 5.

Wave 1 is the first wave in the direction of the trend and is typically the smallest of the five impulse waves. Wave 3 is typically the largest and strongest wave, and it often exceeds the high or low of wave 1. Wave 5 is the final wave in the direction of the trend.

Corrective Waves: Corrective waves are the smaller waves that move against the trend. There are three corrective waves in an uptrend and three corrective waves in a downtrend. Each corrective wave is made up of smaller sub-waves, labeled A, B, and C.

Wave A is the first wave of the corrective pattern and moves against the trend. Wave B is a correction of wave A, and it typically retraces a portion of the price movement of wave A. Wave C is the final wave of the corrective pattern and moves in the direction of the trend. Traders use Elliott Waves Theory to identify potential areas where the price of a currency pair may reverse or consolidate. When the price of a currency pair completes an impulse wave, traders will often look for a corrective wave to follow. They will then look for other technical analysis tools or fundamental analysis to confirm their trading decision.