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Analyzing the price movements in Forex trading is not an easy thing to do. Technical analysis requires traders to have a very good understanding of the market, as well as good skills in using the trading platform and charts.
While there are many trading indicators available in the market, many traders find it hard to decide on a combination of indicators to use for the best outcome. Some traders use too many indicators at the same time, while others use indicators that simply do not go together.
Using Elliott Wave Theory for analyzing the price movements in the market can help Forex traders make better decisions. Combining moving averages and Elliott Waves theory can be a huge help for traders.
"Forces travel in waves, as demonstrated by Galileo, Newton and other scientists." - Ralph Nelson Elliott
But, how exactly does this strategy work, and why should you use it at all? Don't worry, we are here to assist you. Follow our detailed guide to Elliott Wave and MA strategy and learn how to use it for the best outcome.
Developed by Ralph Nelson Elliott, the Elliott Wave theory is one of the most popular theories in the financial markets. The theory was created back in the 1930s when it was largely believed that financial markets were moving in a random and chaotic manner.
The theory aims to prove that the prices are moving in repetitive patterns that can be tracked by technical analysis. This theory is a form of technical analysis that works by determining price patterns that are repeating in the long term and are connected with the psychology and sentiment of individual traders.
The author of the theory found that the price movements in the financial markets were characterized by movements that would repeat themselves over some period of time. He referred to these movements as waves because they are represented on the chart by peaks that look like waves. This theory is a very broad term that, despite being complex, attracts many traders.
This indicator can be a great help for traders who find it hard to understand the price movements in the market. This theory keeps in mind the impact of market psychology and how it can change price movements. Very frequently, this theory is paired with other trading indicators to ensure accurate results.
As we have already mentioned, the Elliot Wave theory aims at determining the price movement. Many technical analysts and traders are trying to find the most profitable wave patterns in the market by using this theory. The theory claims that the price movements in the Forex and other trading markets can be predicted because they are moving up and down in repetitive patterns.
These patterns are called waves according to this theory and are mostly created by trader sentiment or psychology. According to the theory, there are two different types of waves that can be noticed in price movements. They are motive waves, which are also referred to as impulse waves, and corrective waves.
While this theory is used by many traders, it is totally subjective. There are many who believe that this theory can be an amazing help for traders, while others think that it is totally useless and that it would be better to use other indicators for successful trading.
“Since the very character of law is order, or constancy, it follows that all that happens will repeat and can be predicted if we know the law.” - Ralph Nelson Elliott
The thing about wave analysis theory is that it is a bit harder than other analytical options that some traders use. There are no pre-written laws that you might need to follow when using it. Simply put, this theory is used for analyzing price movements in a very deep way, which can be quite hard for some traders to master.
As we have already mentioned earlier, there are different types of waves according to the EW theory. Understanding these types of waves might be very helpful for traders to correctly interpret them.
The two types of waves that can be formed on the Forex trading charts are called impulse waves and corrective waves. We will discuss these two types of waves below.
Impulse waves are used by traders to confirm patterns in the market. In bullish markets, it can be a sign of an uptrend, and in bear markets, it can be a sign of a downtrend.
According to the Elliott Wave theory, impulsive waves are those that consist of five sub-waves. These sub-waves create net movement in the same direction and can be viewed as the trend continuing its direction.
All motive waves are made up of five sub-waves, and impulse waves are no exception. When it comes to impulse waves, there are several unbreakable laws that must happen for the formation to be defined.
The first one is that the second wave can never retrace more than 100 percent of the first wave. The second rule is that out of waves one, three, and five, the third one can never be the shortest.
The third law claims that the fourth wave can never go beyond the third wave at any time whatsoever. If you see that any of these rules are violated on your chart, it means that the structure is not an impulse wave.
Sometimes referred to as diagonal waves, corrective waves are another type of wave according to the EW theory. This wave mostly consists of three sub-waves. These three together are used to make net movement in the opposite direction of the trend.
In most cases, corrective waves are smaller waves as they occur within and against the current market trend. The majority of the traders in the market mostly prefer to trade in the direction of the impulse waves as, during these waves, prices are able to make the largest moves.
To put it simply, it is largely believed that impulse waves can provide traders with more opportunities for making higher profits when compared to corrective waves. On the other hand, many traders are using corrective waves to enter into a trend trade. The main aim for these traders is to try and catch the next impulse wave.
Now that we have broadly defined the Elliott Wave theory and understand the general idea behind how it works, let’s talk a little bit about moving averages and how they can be used to get the most out of the Elliott Wave theory.
Moving Averages are one of the easiest and most popular technical indicators in the Forex trading market. They can be very helpful, especially over 10, 50, 100, and 200-day periods.
There are different types of moving averages available in the market, such as simple moving averages (SMA), measuring average prices over a specific period of time, and exponential moving averages (EMA) which also measure an average price but, focus more on recent prices. Both of these indicators can be used to build a basic Forex trading structure.
While moving averages are very helpful for Forex traders, they are mostly used in combination with other Forex trading indicators for the best outcome. Moving averages are primarily used by Forex traders as trend indicators and can be used to identify support and resistance levels in the Forex trading market.
A very important factor about moving averages is that they are lagging indicators, meaning that they can't be used to predict future market price movements on their own. These trading indicators are the best for strongly trending markets.
As we have already mentioned, moving averages are very rarely used on their own for defining the possible direction the market could take. However, they can be a great addition to different types of strategies.
One of the greatest uses for MAs is using it in pairs with EWT. As mentioned above, moving averages are very good in strongly trending markets, and Elliott Waves can be a great indicator to find the best trending conditions in the market.
Moving averages can help traders when it comes to identifying wave patterns. Using MAs can make it easier for traders to identify correct waves in the market. Elliot waves theory paired with moving averages can create a great strategy for Forex traders.
Simply put, these two give one another what they are missing on their own. While MAs can’t be used to determine future price movements in the market, used with EWT, they can help traders to make sense of the ongoing events in the market. Moving averages can be a great help for traders when determining the price waves on the chart.
If you are new to wave trading, it is especially useful to use moving averages when getting started. The main reason behind this is that a moving average on your chart can make it easier for you to train yourself to identify Elliott Wave patterns.
If you do not have prior experience using Elliott Wave theory, it can be quite hard for you to identify the waves on the charts at first without using MA's. Using a moving average will draw a special line on your chart, making it easier to differentiate between the waves, and it can also be easier to count the number of waves to identify which type you are dealing with.
While the majority of traders using MA's for identifying Elliott Waves are beginner traders, many experienced traders are also using this pairing. The thing is, it can be quite confusing to understand the Forex trading charts, especially when you are trading for a long period of time. MA's make it easier for your eye to determine where the waves start, where they end, how many of them there are, and so on.
When using the moving average and Elliott Waves strategy, many traders are confused about which timeframe to use. The thing is, it depends on several factors. First of all, the type of trader you are. If you are a long-term trader, you will need to use different types of timeframes than a short-term trader would have to use.
It should be noted that Elliott waves can be used with all timeframes. However, it is believed that lower time frames are more difficult. According to market experts, anything below 1 hour can lead to different types of issues and errors that can have an impact on the final outcome of your trading.
This is especially true for beginners who are using waves with lower time frames. It is believed that the best time frames for this strategy are the 1 and 4-hour charts as they are a lot easier to read and can also provide a lot of flexibility and higher accuracy. On the other hand, daily charts can also offer good clarity, but it is believed to be slower in their price movement.
While there are numerous advantages associated with using the Elliott Wave theory, there are several drawbacks to this strategy that traders should consider before deciding to employ it. Below, we will discuss the main pros and cons of this strategy to help you understand whether this strategy can be a good choice for you.
One of the biggest advantages of using this strategy is that it can be easier for traders to determine market trends. Using MAs in this process can make everything even easier. Once you are able to determine the general market trends and conditions, making the right movements is a lot easier for making better and higher profits.
The Elliott Wave theory is a useful diagnostic tool for finding prospective trading opportunities. It works by organizing price movement data into clear, graphical representations. Even if you are a total beginner in the market, you can still benefit from this theory if you have even a little understanding of its basic principles and how to put them to use in your own trading methods.
While it is true that wave analysis can be quite helpful, there are some limitations associated with it. For example, it should be noted that without a deep analysis of the market, it can very easily be understood in the wrong way.
It requires traders to have a lot of experience and a good understanding of the market to make sure they do not mistake small price movements in the market with wave patterns. This is especially true for corrective patterns, as they can be much more complex and harder to understand than impulsive patterns.
One of the biggest disadvantages of this strategy is that as much as it can help traders to determine market trends, something can always go differently in the market. You might be sure that your findings are absolutely correct, but something can happen in the market that you could not predict earlier, and it can unveil an alternative scenario.
Because of this, it is important for traders to have a very good understanding of the market to ensure they are doing everything correctly.
It is considered that the best time frame to use the Elliott Wave theory combined with moving averages is the 1-hour and 4-hour timeframes. Anything lower than a 1-hour timeframe can be very hard to use for traders, especially for those who are beginners. This strategy can also be used with a daily chart, but the information might be less trustworthy with longer timeframes. However, in general, it is viewed that this strategy can be used in almost all timeframes.
Yes, Elliott Wave theory works. Although there are drawbacks and limitations associated with this strategy, it works in most cases. Over the past few years, this strategy has gained a lot of popularity and traction in the Forex trading market and is used by many traders around the world. In most cases, this theory is used with other indicators to ensure an easier understanding of how prices might change in the future.
It is a form of technical analysis that focuses on the idea that the price movements are repeating in the market. This theory identifies impulse waves that set up different types of patterns and corrective waves that are opposing the larger trend. This makes it useful for traders using different types of strategies.
Using moving averages makes identifying waves easier. Understanding Elliott Waves theory and identifying them on the charts totally on your own can be quite a challenge. This is especially true when talking about beginner traders. Thanks to moving averages, this process is made a lot easier and simpler for traders.