Steemit Crypto Academy - Season 2, Week 6 Assignment on Elliott Wave Theory

The Application of Elliot Wave Theory

Elliot Wave Theory(also called EWT) are set of test hypothesis which enables traders to predict the price of asset knowing the market structure follows a particular pattern. In the 1920's, Ralph Nelson Elliott(the creator of the theory), an Accountant, made it known that stock market trades repetitively. His work shows that predominant psychology of investors at a time are straightly correlated to the market cycles. EWT makes it possible to spot stop-loss and determination of possible market movements.

The Application

The EWT shows that the price movements are in five patterns. In the upward trend section, after a five way rise,a three way fall is expected to follow. Also in tgr downward trend section, a three way rise would show up after a five way fall. The three way pattern is called the corrective waves while that of five way pattern is the impulse waves. In the impulse waves, there is a rise in price in the first phase or segment of the trend in which is the period investors do expect a change in trend. As a result of this, a negative denominator in price occurs. On the following wave(Wave 2), the fall in price are minimal but in the 3rd wave the trend boost which brings positive news to the stock market. There is a price reduction in wave four resulting into optimistic checkin by investors. The price reduction that occur in wave four is as a result of profit booking. The EWT is perfect when some indicators such as the RSI and the MACD are combined with it which easy gives good signal for entry and exit point for investors. When applying EWT into Bitcoin trading for instance, the procedures to be followed are similar to the ones of other cryptocurrencies. EWT is important for investors who wants to maximize profit because it is useful in the identification of the market trend direction i.e the increase and decrease in price of currency. The application of EWT assists in knowing the tactics of trade in the foreign exchange market which states the pros and cons and also the underlying profit. The EWT should be used as a supportive measures because of it usefulness in enrichment and great tool for enhancement of trading strategy.

What are Impulse and Corrective Waves?

Impulse and corrective waves are terms which describes the larger trending waves and or corresponding smaller waves in a price trend. Both waves happens in market in time frames which gives price structures. They assist in the figuring out pullbacks,shows reversals, and in the establishment of the direction of market trends.

The IMPULSE WAVE

This are waves that allows the occurrence of trends. It describes the price movements of financial assets in agreement with the prime movement of the underlying trends. The impulse waves is refer to as the downward movement in downtrends and upward movement in uptrends. It has five sub waves in which there movements are in the same direction at the trend of the succeeding largest degree. It moves in the direction of of the trend at one bigger degree. However, there conditions which warrants not to trade in the direction of impulse waves which are:-

(1) When impulse waves are going smaller show the possibility of reversal and no momentum
(2) Occurrence of impulse in opposite direction

THE CORRECTIVE WAVES

This waves is associated with EWT analysis. Waves which movements is opposite the trend of a greater degree is referred to as corrective waves. This waves are smaller moves which the occurance are in opposite direction of the impulse waves. This wave possess three different price movements in which two (A and C) are in the direction of the correction, hence, one is against it which is B. Corrective waves are in five types which includes:-

(1) The Zigzag
(2) Flat
(3) Triangle
(4) Double Three
(5) Triple three

In some cases in order to form a more complex corrective waves the Zigzag, triangle and flat may be combined.

How to easily spot the different waves

The waves can be spot when the market price of an asset is low at the first stage and the price moves a bit below but not the same as the first move after which the price moves up rapidly hence, impulse waves can be spotted. Also if the waves gives a Zigzag,triangle or flat formations which the corrective waves can easily be spotted there.

My Thoughts on EWT and reason

The EWT can be said to be a indictment study which seeks for a long-term price model which relates to the constant changes in investors sentiments. It seeks the market price direction through waves(impulse and corrective). EWT is an analysis which all traders and investor must know and likewise understands the application bwcae it gives or shows information on when and when not to invest in a particular asset with the help of the waves which predict the present condition of the stock market.

Coinchart

Coinchart in which Impulse and Corrective waves are spotted(The cryptocurrency in use is BITCOIN)

As seen in the chart above the Impulse waves which is number 1,2,3,4 and 5 which moves in the same direction at the upward trend of the market price which gives the intending investors signal that they can invest at a present time in order to maximize profit in the stock market.
In the corrective waves which gives triangular formation which is an indication that the movement in market price volatile and volume are on a decrease.

Cc: @fendit