Elliott Waves Principle is a universal law of the market that was discovered by R.N. Elliott in the 1930s. What he found was that there was a regular wave pattern that was being repeated in the stock market over and over again. Later on this principle was found to be applicable to all the markets including the forex market.
Price action can be divided into tends and corrections or sideways movements. Elliott Waves Theory stipulates that markets move in repetitive patterns. There is always a five wave advance ( impulse waves) and a three wave decline (corrective waves). Waves 1, 3 and 5 are the impulse waves, wave 3 being the longest. Waves 2 and 4 are the corrective waves. These impulse waves are the trends in the market and the corrective waves are the sideway movements in the market.
These Elliott Wave Pattern can be found on all timeframes from intraday to higher. Each wave in this patterns can be further subdivided into smaller patterns.
In this forex trading strategy, we will be using this Elliott Wave Pattern with the help of three Elliott Wave Indicators.
On most of the charting software, you will find these three Elliott Wave Indicators as part of the advanced package. These three Elliott Wave indicators are:
1. Elliott Wave Trend (ET)
2. Elliott Wave Number (EN)
3. Elliott Wave Oscillator (EWO)
Now, these are the rules that you need to follow for entering a long position: EN that counts the number of Elliott Waves should be either 3 or 5. As said above, wave#3 is the longest wave and if the EN is 3, it means a highly profitable trade. ET should be either 0 or 1 while EWO that measures the momentum should be a positive number, the higher the better. The three indicators when line up together, enter into a long trade and exit when EWO become negative.
In the same manner, for making a short trade, EN should be 4. Wave#4 is a counter trend or corrective wave. ET should be either 0 or -1 while EWO that measure the momentum should be a negative number. When you find the three indicators lined up together enter into a short trade and exit when EWO becomes positive.
You can use this Elliot Wave Trading Strategy on stocks as well as on commodities. This strategy can be used on smaller timeframes like the 5 minute charts as well as on longer timeframes. Good Luck!