Elliot Wave theory and Forex

[nadine]

The Elliott Wave Theory is built on the very basic assumption that the long term economy of the human society is going up in the long term, with stock market indices as an indicator to track the progress. Thus the basic wave structure is a 5 waves up, 3 waves down.


However, Forex is a very different market than stock since it's a comparison of the relative economy of 2 different countries. And one country won't be foreverly having faster growth than others.

Based on this understanding, using Wave Theory on Forex is simply ridiculous.


Any comment from you guys? I know some traders are using wave theory in Forex, how do you use it?

[millionarepopcorn]

I don't agree with your statement...
Ok, one country's economy will not always grow faster than other's (therefore currency pair cannot be constantly in bull market like Dow is), but market is moving in waves and these waves are having 5-3 configuration... You will not have those configurations on monthly charts (instead you'll have labels a,b,c,x...) but once you define impulse or corrective wave on these long term charts you can apply elliot wave theory on weekly and daily charts (4h,1h etc...)...

Note that I'm not an elliot wave theory expert but I use it successfuly in FX...
Combining elliot wave and fibonacci is IMHO very appliable on forex markets...

[nadine]

One of the beauty (IMHO) of EWT is that waves group together to form waves of larger degrees and divides into subwaves of lower degrees.

So somehow, a certain wave we identify at a certain degree will be part of a wave of a higher degree which in turn is part of a wave of another higher degree.

So in the end, in order to maintain the same 5 wave structure throughout all degrees, we must assume a certain currency is always in bull market of the largest degree relative to another one.

This doesn't make sense.

[millionarepopcorn]

You cannot have the same amout of waves in all degrees - that's a fact... Not even Dow is moving in this perfect idealized bull market...

[nadine]

Somehow, DOW's history fit into EWT quite well.

[pipstranger]

Nadine, Elliott's theory is first and foremost about the BASIC form of the manifestation of price movement.

Elliott was so enthused about the fibo ratio/series he referred to it as 'Natures Law', providing numerous examples of its manifestation other than price movement to illustrate his belief. While the manifestation of fibo ratios/series in a tree and a flower may be similar, one doesn't expect the growth of the flower to be as great as that of the tree.

There is then something of a dichotomy between human activity v Natures Law, as interpreted by Elliott, that in attempting to provide a 'single theory' to describe, EWT comes up short, or perhaps, overstates reality.

EWT fits into the DJI because the stocks in the index are weighted and owned in large quantities by many people, creating 'perfect' (?) balance EW/fibo price manifestation.

You should read Tom Joseph's 'Advanced Get Mechanical Trading System' which you may find helpful in trading with the EWT.

[nadine]

Pipstranger,

So how do you use EWT in forex?

I personally find it's quite useful in corrective patterns, both from the look and ratio perspective.

However, the 5-3 squence fits quite well in the trending markets too.

The only thing that confuses me is the basis of EWT's foundation.

[pipstranger]

Hello nadine, I use the fibo tool on 'every' wave to project Corrections/Retracements and new H/L price targets, and MetaStock's 'Standard Error Channel' as soon as 3 wave points are available to draw a channel.

I use Lucas numbers to count bars and waves rather than the fibo series. I'd like to be able to make better time projections, price is easy.

Never questioned Elliott's theory, so please explain your confusion in more detail, it'll be interesting to learn your thoughts about the basis of EWT's foundation.

[nadine]

Market behaves very differently in corrective mode than in impulsive mode. For example, in the 'last' Super Cycle of US stocks from 1932, market behaviour in wave 4 (1966-1974) and in wave 5 (1974-1999) was very different.

And theoretically, in impulse, a 5 will be followed by a 3, then 5 then 3 then 5. While in corrective mode, a 5 can be followed by a 3 then 5 in a zig zag, then end.

Without knowing whether we're in impulse or correction, we can anticaple whether there will be a wave 5 or not.

So in case of forex, since IMHO, a certain currency won't be foreverly stronger than another, and so there shouldn't be any 'impulse' from a Cycle or SuperCycle perspective. Without impulse, then we'll only in correction all the time.


Another perspective is that, the currency pairs are relative. That means EUR/USD is EUR/USD because it's set to be EUR/USD. If EUR/USD is not EUR/USD but USD/EUR, will EWT be reversed to be 5 wave down, 3 wave up, 5 wave down, 3 wave up and ended with 5 wave down?



Finally, if stock market index is a way to track economy performance of a certain country, Forex can be viewed as the relative performance of 2 certain countries. With say, US economy follows EWT and say JP economy follows EWT, will the result of the comaprison of 2 economies, i.e. USD/YEN, follows EWT too? Why?

[pipstranger]

"So in case of forex, since IMHO, a certain currency won't be foreverly stronger than another, and so there shouldn't be any 'impulse' from a Cycle or SuperCycle perspective. Without impulse, then we'll only in correction all the time."
Yes, essentially, as is the case with many commodities, though impulse waves still exist; also currencies can go into 'meltdown', vis the Rouble.

"Another perspective is that, the currency pairs are relative. That means EUR/USD is EUR/USD because it's set to be EUR/USD. If EUR/USD is not EUR/USD but USD/EUR, will EWT be reversed to be 5 wave down, 3 wave up, 5 wave down, 3 wave up and ended with 5 wave down?"
Yes, and many charting programs allow you to invert charts.

"Finally, if stock market index is a way to track economy performance of a certain country, Forex can be viewed as the relative performance of 2 certain countries. With say, US economy follows EWT and say JP economy follows EWT, will the result of the comaprison of 2 economies, i.e. USD/YEN, follows EWT too? Why?"
Neither the US economy nor currencies follow the EWT. Stock markets are thermometers of optimism and pessimism. Currencies are a substitute for goods/labour. To trade is to negotiate, currencies are negotiable.

All that the EWT is nadine, is a measuring tool — a tape measure with ambiguous how-to-measure instructions.