How to Use the Elliott Wave Indicator for Forex Trading

The Elliott Wave Theory is a great tool for technical analysis. Developed in the 1930s, Elliott Wave Theory identifies patterns in the waves of price action that help you make market predictions. Ralph Elliott, the developer of Elliott Wave Theory, proposed it to explain the seemingly chaotic behavior of markets. He posited that markets do not move chaotically but rather move in predictable cycles he called waves. He identified price as progressing in five impulse waves and three corrective waves. These patterns can be identified and leveraged to make market predictions about where the price will go. There is also a wave MetaTrader indicator that will do the heavy lifting for you.

What is Elliott Wave Theory?

Elliott Wave Theory identifies five structures known as impulse waves. What this means in simple terms is that five waves move in the direction of the impulse trend. This is called the impulse wave. This impulse wave is followed by three waves in the opposite direction. This movement is called a correction wave. This 5-3 pattern repeats throughout the entire life of a market. However, the time span of each wave and the magnitude can differ.

Do I Need to Understand Elliott Wave Theory?

The impulse waves are generally labeled 1, 2, 3, 4 and 5 in the order they occur. The waves that make up the correction waves are labeled A, B, and C. Elliott Wave Theory goes on to define several different degrees of waves—nine to be exact. But this level of knowledge is not necessary to use the MT4 Elliott Wave Oscillator. What is important is that you understand Elliott Wave theory at a basic level—to an extent where you can understand how it works and what the labels mean and what their significance is. The Elliott Wave indicator will do the rest.

MT4 Elliott Wave Count Indicator

The Elliott Wave Count Indicator counts the waves for you and makes it easier to see where one wave ends and another begins. Just because this work is done for you doesn’t mean that it is a “set and forget” path to riches—far from it. You still need to have enough knowledge to tell what is happening and to apply that knowledge. The rules of Elliott Wave Theory can be kind of complicated.

For example:

• Wave 2 should never retrace Wave 1 by more than 100%;
  
• Wave 3 must not be the shortest of the three impulse waves'
  
• Wave 4 cannot overlap with Wave 1.
  

Therefore, it is extremely helpful to have a tool like the Elliott Wave indicators that figures all this out for you.

Trading Using the Elliott Waves Indicator

Once wave 1 has completed and wave 2 is beginning to form, closely examine the Fibonacci levels of 0.500 and 0.618. If you see reversal patterns at these levels. such as a doji candle, you should be ready to enter a trade. Set your stop loss beyond the 100% retracement of wave 1. At this point, you will be riding wave 2. If the Elliott Wave pattern holds, you know according to the rules that wave 3 should not be the shortest of the three impulse waves. This does not necessarily mean that it will be the longest impulse wave, but ideally this will be the case. Wave 4 will set in after wave 3 completes and begin to give up some of wave 3’s gains, but it should not release all of them. But if it does, it is just consolidation in preparation for wave 5. You could take profit at the end of wave 3, close only a partial portion, or hang on for the ride with the full position. Once wave 5 reaches the high of wave 3, you should begin to consider exiting the position. A trailing stop when the wave 5 begins to lose momentum is a good plan.