Elliott Wave 101

Elliott Wave is one of the most interesting development in price action analysis. A lot of price action traders often say technical indicators are useless. Every expert trader be it on stocks or currency refuses to trade with indicators. That is not to say they don’t help but to rely on indicators has no significant impact on successful trading, they simply allow you to trade. Personally I do favour channel strategies over any other kind so my attraction to Elliot wave is strong.  The reason why most traders say this is because institutions are in the habit of profiting so they need to know when to make the big moves that influence the order flow so they have to rely on the market psychology.

Ralph Elliott applied crowd psychology to the markets, he thought people moves markets and since all price action is based on fear and greed let’s investigate the levels of fear and greed that can occur. Elliot transformed his findings into the Elliot wave principle or theory. The premise is that all price action moves in waves, a bullish  impulse wave (greed) and a bearish correction (fear) and there are 5 waves in each move before a larger  correction then a continuation or reversal.

The first wave consists of a few smart or maybe foolish people deciding that the stock or currency is a bargain and decide to buy it

The second wave is a correction as those same people get scared and decided to start selling deciding that the stock is overvalued and they surely can’t make more.


The third wave is the one all the big institutions join this is the one that really takes the stock higher an any news released is made to look good even if bad to drive the stock further because those news bobbin winders know what institutional money can do. This is usually a strong movement.

The fourth wave, is what I like to call ‘the smart money get out wave’, this is selling that ensues as smart money attempts to leave.

The fifth wave is the final party the word is out every Joe blogs is on the game a panic sell will soon ensue which will lead to several correctional phases or a simple ABC correction.

Elliot Waves are the worst kept secret in the business. 90% of traders are using all kinds of technical indicators that for the most part lag behind the prices so at best it becomes a game of probability especially when trading shorter time frames.

I will be doing some live trading sessions coming soon with Elliott wave.