Wrapping it up on Elliot Wave Theory

Video Transcription:

Hello, traders. Welcome to the Elliott Wave Theory course, and the fourth module: Guidelines of the Elliott Wave sequence.

On this final lesson, we are going to do an Elliot Wave Theory wrap-up, and we are going to go to a live Euro/US dollar chart and we’re going to analyze price action to see where we can take some trades on with an excellent risk to reward ratio.

Elliot Wave image trading

Now this is a 50-minute Euro/US dollar chart. And as you can see, we have come to this high and we are now in a downswing. Now the first thing we’re going to do is we’re going to analyze the last part of the chart, which is this downswing or down movement from this high to this low. And we are down for about 550 pips. But that really doesn’t matter because we are going to call this point X, or the first wave, we can see that we have wave one and we made it this low and then we have a very steep correction or corrective move to the upside. This completely breaks with the down structure that we were in. With a very normal trend line, you can see that we break with the down structure. And for that reason, we can name this low the end of wave one.

Now this is the end of wave one, so this must be the beginning of wave two. And as you can see, we have the retraced… Let me just grab here a Fibonacci retracement tool. Okay, and I’m going to add a few Fibonacci ratios that are missing here. Like the 50% and the 61. 8% right here, 0.618, and of course I’m going to name it the 61.8.

Now you can see that we came right at the 50 Fibonacci retracement level on this wave two, which means that we didn’t retrace 100% of wave one, which means that we are or we can be in a five-wave basic structure on… I’m sorry. This is wave two not wave five of a down five-wave structure. If this is the end of wave two at the 50% Fibonacci retracement level, this must be the start of wave three.

Now let me just insert some rectangles here. Where are the shapes here? Some rectangles to know where the end of wave one is. Right here. Because remember we have rules when it comes to the Elliott Wave theory, and wave four cannot retrace more than the bottom of wave one, and wave two cannot surpass or cannot retrace 100% of wave one.

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So for right now, what the Elliott Wave Theory tells us, we are good to go because this is wave two, and right now we are going to use a Fibonacci expansion of course. Where is it? It’s right here. I’m sorry. Let me just retake it.

All right, here we go. So we have now the Fibonacci expansion of wave one and you can see that we hit right here, the 161 expansion of wave one. So this means that this is the zone where wave three is going to end. We have wave one, then we have wave two that retraces 50% of wave one, then we have wave three that expands 161% making it not the smallest wave of the count.

So right now we are at the end of wave three. And this is where it becomes very interesting, guys, because what is going to happen right now? Well, what’s going to happen right now is that we are going to wait for the end of wave four. And wave four is going to end right about here at this level. Now this is the 50% retracement of the entire move down. But if you want to be more precise, here you go. You have a 61.8% retracement right at the bottom of wave one, which means that wave four is going to perhaps retrace 61% of wave three and we are going to try and sell the 61.8% at the 140.20 level. So this means that we are looking at the end of wave four right below this 61.8 and this yellow zone. And this means that we are going to look for a wave three that comes from this low to this high.

Now this is going to be our sales zone, but where is going to be our take profit area? Well, our take profit area is going to be right around this level, the 127.2%. And why is it going to be the 127.2% our profit area for wave five? Well, that’s simple. Let me just name it. Our wave five is going to be right at the 127% and this is going to be the ride that we are going to be taking. So the ride that we are going to be taking is approximately a 300-pip, which means that we are looking at a 300-pip profit for about a 40-pip stop loss. So that is huge and that is why we are going to be analyzing price action with the Elliott Wave Theory. And the reason this is our target zone… Let me just get rid of this….No, I’m going to use this as our target zone. So this is our target area right here.

And the reason we are going to be taking profits right here at the 127.2% is because we might be in an even bigger 1-2-3-4-5 basic pattern, which means that right here, let me just make it even bigger and make it blue. We can have the end of wave one and this entire 1-2-3-4-5 pattern can be in fact the end of wave two of a bigger pattern. Remember that this is the 50-minute Euro/US dollar chart. And if we are correct and we grab our Fibonacci tool, we should be, let me just delete all of it, around the 78/2 ratio. While between the 78/2 and the 88/6. So if I move this just a little further down, you can see that’s exactly where we are at of this big wave one. So this might be the end of wave five on the smaller pattern but it can also be the end of wave two, which will mean that this will make an extremely big buy zone for swing traders.

So this is basically how you’re going to be using the Elliot Wave Theory, and of course you can always use the Elliot Wave Theory when it comes to price patterns such as this one right here. If you like to trade on the smaller terms, you can see that here we have a five-wave triangle and we break on point E. But the most important thing to remember about the Elliott Wave Theory is just how we can perfectly time our entries using it.

Adam

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Adam is an experienced financial trader who writes about Forex trading, binary options, technical analysis and more.

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