By Admiral Markets
Many Forex and CFD traders try to apply the Elliott Wave theory for a short while…
…but the majority quickly moves on to the next indicator or tool.
Why does this happen?
Most traders understand, at least partly, the wave theory but find it difficult to apply it to real trading situations.
Well, my goal is to provide a
practical solution to traders who want to give wave analysis a chance.
This article explains a simple step-by-step approach that allows traders to
gradually start using wave analysis.
Please note that this is
not a guide which explains the wave theory itself.
Our wave ebook covers this part in more detail – feel free to sign up below:
Why Forex and CFD traders struggle with wave analysis
Each trader has their own experience and difficulties with trying out wave analysis.
However, most traders give up on wave analysis due to one of the following reasons (I included solutions after the arrows):
- not knowing the wave theory → learn theory
- not able to apply wave theory on the charts → build experience
- insecure about their wave application (wave count) → build experience
- trading wave count too soon without experience → step-by-step process
- applying a full wave count from the start → step-by-step process.
The biggest problem is that traders expect too much too soon from wave analysis (point 4 and 5).
They immediately rely on waves for
all of their trading decisions…
…however, wave analysis is most useful for understanding the market structure and as a confluence tool –
especially when starting to use waves for trade decisions.
Applying wave analysis is a step-by-step process that cannot be rushed.
The second-biggest problem is that traders feel insecure about their wave approach.
Logically, it takes
time to build up experience with applying waves.
Traders simply cannot expect to take the best wave trades right away from the start.
The solution: gradually apply trading waves
As I often say in
live webinars, there are roughly five steps in a trader’s transition from not applying waves to fully labelling waves on multiple time frames.
Let me be clear that one step is
not better than another.
They are all equal – Forex and CFD traders need to find one that suits them best.
- Not using waves, swing or impulse and correction.
- Using swings, impulse and correction.
- Looking at multiple swings.
- Partial wave count labelling.
- Full wave count labelling.
The first steps in using waves
The best place to start is to analyse whether a swing (a group of candles) is moving:
This is the first key step when analysing waves because traders are decomposing the story and psychology behind the moves.
- a bullish corrective swing → I could expect a choppy upside until a bigger resistance appears (depending on the market structure)
- a bearish momentum swing → I could expect a shallow pullback and momentum continuation that pushes beyond support (depending on the market structure).
A trader’s ability to understand the market structure will increase just by learning what impulse and correction are and knowing how to recognise them.
The next step is to connect multiple swings and understand the flow behind them.
multiple swings instead of just one, traders can build a larger understanding of the market structure.
…the current swing is the start of a bearish impulse and the previous two swings were bearish impulse and bullish correction…
…a trader could conclude that a continuation of the bearish momentum is likely.
Only now start with labelling
Usually, Forex and CFD traders start with the labelling waves, but the most important step is to understand momentum and correction.
Practice this first with dedicated engagement before moving on.
Once you see your experience grow, it’s time to add and label wave counts:
- add the wave count when the wave structure is clear (find logical pieces and skip difficult parts)
- monitor whether the wave count, invalidation levels and confirmation levels worked out and learn from the process
- learn from the feedback to gain experience
- start adding wave counts when it’s useful and beneficial (either partially or fully).
For more information on wave rules and guidelines, see the video below.
Realise that wave analysis is not the best method when used as a stand alone wave
trading strategy (unless someone has huge experience).
Wave analysis is much better as a confluence tool.
I firmly believe that waves are valuable for all Forex and CFD traders, especially for:
- better understanding the market structure
- identifying the trend
- finding confluence or deviations
- spotting confirmation and invalidation levels in your analysis.
However, it is an art and science that is not suitable for every trader.
If you have tried wave analysis for some time and still don’t know if that’s helping you, maybe it’s time to say
adieu to this form of analysis and move on.
What is your view on waves?
Do you think that the above cheat sheet will help you learn wave analysis?
For more exact details on wave counts, check out my daily
Keep in mind that the
Webtrader platform from Admiral Markets allows you to easily add wave counts to chart.
Admiral Markets is dedicated to continue its educational efforts after winning the
Best Educator award during the Forex awards of 2016.
Cheers and safe trading,
Article by Admiral Markets
Admiral Markets is a leading online provider, offering trading with Forex and CFDs on stocks, indices, precious metals and energy.