Elliott Wave Principle

Elliott Wave Principle

Elliott Wave Principle

The Elliott Wave Principle is a form of technical analysis used by traders to analyze financial market cycles and forecast market trends. Ralph Nelson Elliott developed this theory in the late 1920s by discovering that stock markets move in repetitive cycles rather than in some chaotic manner. He discovered that these market cycles have to do with traders’ reactions to outside influences: upward and downward swings of mass psychology always showed up in the same repetitive patterns – these are called Elliott waves. If you would like to find out how one can use them in the binary options industry, read on!

Elliott Wave Principle | Advantages

There are a lot of benefits one can get if they apply the Elliott Waves Principle when analyzing movements on the market. First of all, with this principle traders can identify the direction of the dominant trend, which is good because this makes it much easier to trade ( don’t forget that ‘the trend is your friend’) and they can also identify countertrend moves. As Elliott noticed, wave patterns form larger and smaller versions of themselves. This means that price activity is Fractal, which helps traders recognize the maturity of a trend.

Another useful thing you can do with the Elliott Waves Principle is to determine the point of a trade’s fail. Since there are 5 Elliott waves per chart, there are 3 rules you have to follow in order to predict the specific point of ruin. Firstly, wave 2 can never retrace more than 100% of wave 1. Secondly, wave 4 can never end in the price territory of wave 1. Thirdly, out of the 3 impulse waves (1, 3 and 5), wave 3 can never be the shortest.

Elliot Wave Principle | Simple and Complex Corrections

The next thing we’ll talk about are corrections. When it comes to Elliott waves, there are two types of corrections: simple and complex. In a simple correction, wave 1 that follows a five-wave structure can be formed out of a simple correction (1, 2, 3 of a lower degree). A complex correction means that instead of a simple 1, 2, 3 structure market forms more than one Corrective Wave of a lower degree, and in this case an ‘x’ wave appears to the equation.

When trading in accordance with the Elliot Waves Principle, the most important thing is to be aware of the rule of alteration. If the second wave is a simple correction that respects all the rules of a simple correction, then the fourth wave will probably be a complex one. In other words, if you want to buy a call option while market is in a complex correction, you should look for a bigger expiration date when compared to an expiration date from a simple correction.

Elliott Wave Principle | Conclusion

The Elliott Wave Principle is something you should definitely get familiar with if you want to trade binary options. If you understand Elliott waves, you will understand many things in the markets’ behavior. Although Elliott waves’ charts can seem complicated, they aren’t that hard to interpret. Once you learn how to handle them, you will immensely improve your trading. Star practicing now in order to become a better trader!

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FURTHER READING:

1. Empirical Case Study of Binary Options Trading: An Interdisciplinary Application of Telecommunications Methodology to Financial Economics (G Giunta, F Benedetto – 2012)
2. Common Stocks And Uncommon Profits (P. Fisher, 2003)
3. How To Make Money In Stocks (William J. O’Neil, 1995)
4. Market Wizards (J. D. Schwager, 1989)
5. The Little Book Of Behavioral Investing: How Not To Be Your Worst Enemy (J. Montier, 2010)

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Author: Ben Prescott
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