Does Elliot Wave Work on Gold?
Elliot Wave theory was devised by stock market analyst Ralph Nelson Elliott during the 1920s and 1930s and suggests that financial markets tend to move in identifiable patterns that can help traders predict future price action. Although widely popular among traders, its accuracy remains controversial.
Fibonacci retracement tools are frequently utilized by traders who employ Elliott Theory, as both Elliott and Fibonacci recognized that waves with similar degrees in impulse and corrective sequences often exhibit relationships among themselves.
What is Elliot Wave?
The Elliott Wave Theory attempts to distill market movements into discernible patterns that can be studied. These patterns, known as waves, include impulse and corrective waves.
Elliott observed that market prices move in repeating cycles. He thought these cycles could help him forecast future market prices more accurately.
This theory relies on analyzing price charts to recognize wave patterns, often of fractal nature. Pattern recognition helps predict what markets may do next by trying to predict patterns; however, this task requires experience and practice in order to accurately read charts and calculate correct wave counts.
What is Wave 1?
Elliott divided waves into two distinct categories, motive and corrective waves. Motive waves move with the overall trend while corrective ones go against it.
Traders frequently observe a sharp, countertrend correction that covers only a short distance in Wave 2 known as a double zigzag formation.
When this occurs, it is often an indicator that complex correction is in progress. According to the rule of alternation, any short sharp move in Wave 2 must be followed by a more gradual and complex mild move in Wave 4. This serves as a useful guideline that traders can follow when analyzing a wave pattern.
What is Wave 2?
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Wave 2 can take several forms; typically it appears as a zigzag pattern but may also take the shape of a Flat or Expanded Flat formation. Trading shallow Wave 2 retracements is risky due to it being hard to predict how deep of an adjustment there will be.
Speeds can reach four times that of Wave 1, with four spatial streams instead of just three compared to Wave 1. This represents an unprecedented improvement expected to result in greater productivity and less downtime.
What is Wave 3?
Elliott’s model asserts that market prices oscillate between impulsive and corrective phases on all time scales of trend. Each impulse wave can be subdivided into five lower-degree waves; corrective waves retrace 38% or more of their preceding wave; this phenomenon is commonly recognized by traders as characteristic “diagonal” shapes of waves.
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What is Wave 4?
As a trend enters its third wave, sentiment shifts toward bullish and fundamental analysts raise earnings estimates. Prices then quickly surge higher with only minor and short-lived corrections occurring during that period; traders become greedy.
Corrective waves usually form fours; these sideways movements provide the basis for their final wave 5 which typically reaches back into its previous territory as a lesser wave 4.
W4 waves may also take the form of double or triple (W-X-Y) zigzags that are less prevalent; these tend to retrace less than 38.2% retracement levels of Wave 3, as well as having a 0.618 relationship to Wave 1.
What is Wave 5?
Wave 5 can be the hardest to spot. It usually reaches new highs but doesn’t reach their anticipated targets price. Additionally, volume may decline and momentum indicators could begin displaying signs of negative divergence.
As prices near the end of Wave 3, it may be useful to draw a trend channel through the tops of waves 1 and 3, acting as the initial price target for Wave 4. When drawing this channel, its upper side can serve as a first price target for Wave 4.
Wave 4 typically retraces no more than 23.6% or 38.2% of wave 3, and in an extended market it would follow that waves 1 through 5 will have an almost exact relationship of 0.618 with each other.
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