One thing we should keep in mind about Elliott waves is that they’re the best method of analysis when they’re used in certain situations. There are times, however, when the Elliott waves are not useful at all. The reason is that the Elliott waves are inherently contrarian, and if you are on a strong trend, you need to know that you are on wave 3 and you shouldn’t be looking for a higher low. In other words, when you’re riding on the Elliott waves, the trend isn’t always your friend. Just like any other type of analysis, Elliott wave analysis should be used with other elements of the Invest Diva Diamond analysis, whether those elements are the technical patterns, momentum indicators, candles, or fundamentals.
Anyway, it’s time to party again! I’m looking at the EUR/USD daily chart, and I notice something interesting going on starting from April 2012. It seems the pair has been on a general downward move. Let’s see if we can catch a number of downward Elliott impulse waves. Can You Identify the Elliott Waves? Well I do. Of course, I’m the Invest Diva.
How do I start my count? Exactly the way I would start my analysis in the search for Mr. Right. I will go back to the three eternal Elliott rules and other guidelines to see which one of them I can apply here.
Rule 1. Wave 2 can never go beyond the start of wave 1.
Two Elliott Waves and Counting. Looks good so far!
Rule 2. Wave 3 can never be the shortest of the impulse waves.
Wave 3 of Five Elliott Waves Is the Longest Impulse Wave So Far and it looks pretty long!
Rule 3. Wave 4 can never cross into the same price as wave 1.
Wave 4 is nowhere even close to wave 1! Nice. It seems we’ve spotted an Elliott behavior in the market sentiment. So how can we make money using this?
Based on Mr. Elliott’s theory, we should be expecting a corrective action in the market. We can already see the market moving a bit upward, so this could be our buy signal.
Let’s see what happened next…(see figure below)
This was one example of how we can use Elliott wave theory in our trading. Sometimes, after we have identified wave 2 and reconfirmed with technicals and fundamentals, we can ride on a strong trend of the wave 3 and earn some pips.
Obviously, it is now your turn to open your demo account and spot some Elliott waves, whether ones that have already been completed or ones that you suspect are in the process of forming.