Elliott Wave Pattern, also known as Elliott Wave Theory, is a method of analyzing price charts developed by American financial analyst Ralph Nelson Elliott. It is based on the assumption that market prices move in certain cyclical waves and have a characteristic structure.
The basic principles of the Elliott Wave pattern include:1. Wave structure: The Elliott Wave pattern assumes that market prices form five ascending waves (called "impulse waves") and three descending waves (called "corrective waves").
Impulse waves indicate the main movement of the market in the direction of the trend, and corrective waves represent temporary deviations from the main trend.
2. Fibonacci Ratios: When analyzing the Elliott Wave pattern, Fibonacci ratios are used to determine potential support and resistance levels on the chart. Often prices return to certain Fibonacci levels after the completion of the wave structure.
3. Interaction of waves: The wave structure of the Elliott Wave pattern assumes that each wave has a connection with other waves and their relationships. For example, the third wave is usually the longest and strongest, and the fifth wave may be weaker than the previous ones.
The use of the Elliott Wave pattern in trading may include the following aspects:1. Trend Detection: The Elliott Wave pattern can help a trader determine the current market trend and its possible continuation or completion.
This can help the trader in making decisions about entering or exiting a position.
2. Determining Profit Targets: Elliott Wave pattern analysis can help a trader determine potential profit target levels based on Fibonacci ratios. This allows you to set exit levels from a position and lock in profits.
3. Risk Management: The Elliott Wave pattern can also help a trader determine stop loss levels for risk management. This allows the trader to limit potential losses in the event of an unfavorable price movement.
It is important to note that the successful use of the Elliott Wave pattern requires practice, experience and additional confirmatory analysis. Traders usually combine it with other tools and strategies to increase the reliability of signals and make more informed decisions.
