Ralph Nelson Elliott discovered the Elliott Wave principle in the late 1920s. He discovered that stock markets do not behave in a chaotic manner, but that markets move in repetitive cycles. They didn’t have the Forex market yet 🙂
How To Spot Forex Trading Signals Using Elliott Wave Theory in The Forex Market?
The cycles that Ralph Nelson Elliott discovered reflect the actions and emotions of humans caused by exterior influences or mass psychology. Elliott contended, that the ebb and flow of mass psychology always revealed itself in the same repetitive patterns, which subdivide into so called “waves”. The financial markets are perhaps the greatest example of mass psychology in a quantified form.
In part Elliott based his work on the Dow Theory, which also defines price movement in terms of waves, but Elliott discovered the fractal nature of market action. Thus Elliott was able to analyze markets in greater depth, identifying the specific characteristics of wave patterns and making detailed market predictions based on the patterns he had identified.
Fractals are mathematical structures, which on an ever-smaller scale infinitely repeat themselves. The patterns that Elliott discovered are built in the same way. An impulsive wave, which goes with the main trend, always shows five waves in its pattern.
Fibonacci patterns also appear in fractal wave patterns in Forex trading, which I mentioned in on the Fibonacci Sequence & Forex Trading post.
On a smaller scale, within each of the impulsive waves of the before mentioned impulse, again five waves will be found. In this smaller pattern, the same pattern repeats itself ad infinitum (these ever-smaller patterns are labeled as different wave degrees in the Elliott Wave Principle).
Only much later did scientists recognize the existence of fractals. In the 1980s the scientist Benoît Mandelbrot proved the existence of fractals in his book “The Fractal Geometry of Nature”. He recognized the fractal structure in numerous objects and life forms, a phenomena Elliott already understood in the 1930s.
In the 1970s, the Elliott Wave Principle gained popularity through the work of Frost and Prechter. They predicted, in the middle of the crisis of the 1970s, the great bull market of the 1980s. Not only did they correctly forecast the bull market but Robert R. Prechter also predicted the crash of 1987 in time and pinpointed the high exactly.
Only after years of study, did Elliott learn to detect these recurring patterns in the stock market. Apart from these patterns Elliott also based his market forecasts on Fibonacci numbers. Everything he knew has been published in several books, which laid the foundation for people like Bolton, Frost and Prechter, to make profitable forecasts, not only for stock markets, but for all financial markets, including Forex trading.
In conclusion, if you have ANY difficulty understanding Elliott Wave Theory, you can skip it and still understand Forex trading without any problem. I’m providing this so you have a basic awareness of the theory behind the Forex indicators. The theory can get very complex, but I’m not trying to give a complete explanation of Elliott Wave Theory in this post (maybe later).
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