How do Elliott Waves work with Forex pairs | Forex Factory

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How do Elliott Waves work with Forex pairs

  • #1
  • First Post: Jan 15, 2014 10:49am Jan 15, 2014 10:49am
Hi guys,

I've been studying EWs for probably 6 weeks and feel like i have a 'decent' grasp on them (i'm managing to count pretty well and my counts often match other internet poster's counts), but I have 1 nagging issue...

I can see how you can establish a solid count on indexes, because naturally they have an actionary impulse and are in an uptrend, so you have a starting point. The reason being is that the index ratio is $/share (not shares/$). The index prices started low and have steadily increased since then - this is always going to be the case.

However, i'm struggling to understand how this works with Forex pairs.

My reason being that if one currency of the pair continues to steadily appreciate over time, then the other currency will depreciate. So what is the eventual outcome of this? Does it mean that eventually the depreciating currency will go bust? Or, will there be a reversal? If so, how does a reversal fit in with the EW Principle?

Thanks for your time,

dirt.
  • #2
  • Jan 15, 2014 11:26am Jan 15, 2014 11:26am
Quoting Dirt
My reason being that if one currency of the pair continues to steadily appreciate over time, then the other currency will depreciate. So what is the eventual outcome of this? Does it mean that eventually the depreciating currency will go bust? Or, will there be a reversal? If so, how does a reversal fit in with the EW Principle?
Ignore the eventual outcome (hard to compare because unlike stocks which will be delisted at a certain point, currencies can be constantly devalued further-- e.g. the Zimbabwean dollar). I like Elliot wave, but I think focusing on getting wave counts correct and fitting the market into a rigid wave analysis sort of misses the point (and a problem many 'Ellioticians' have), which is to provide a qualitative framework of what is occurring in the market in the time frame you are observing.

Currency markets are unique in the sense of being relative to one another, and so any type of market behavior will by default have the inverse behavior on the other side of the market. In other words, if the EURUSD is in a strong uptrend, say on wave 5 of an impulsive move, by default the USDEUR is also on leg 5 of a negative impulsive move.

Sorry that explanation probably does not help much, but I'm sure there are others on the forum who consider themselves EW experts (like I said, I really like wave analysis, but I use it very loosely in my own way and don't believe in Elliot's rules 100%).
  • #3
  • Jan 16, 2014 4:55am Jan 16, 2014 4:55am
Quoting smittens4212
{quote} Ignore the eventual outcome (hard to compare because unlike stocks which will be delisted at a certain point, currencies can be constantly devalued further-- e.g. the Zimbabwean dollar). I like Elliot wave, but I think focusing on getting wave counts correct and fitting the market into a rigid wave analysis sort of misses the point (and a problem many 'Ellioticians' have), which is to provide a qualitative framework of what is occurring in the market in the time frame you are observing. Currency markets are unique in the sense of being relative...
Hi smittens, thanks for your reply.

Your comments about currency devaluation were very insightful, for some reason i didn't even consider that a currency can continue to devaluate towards 0 forever. I think logic avoided me there .

As for how you use EWs, i think that often, i use them quite similarly... Usually obtaining a count on one time frame, and then going from there. Although i must admit, i do still tend to try and use them a little more rigidly than you seem to.

This thread question arose when looking at the entire history of a specific pair, and not being able to establish a count on the monthly TF right from the start of the pair comparison. I was then trying to bring it back to basics... "so what is the overall sentiment of this pair's wave cycle of the highest degree?" I *think* the pair was GBP/JPY (might be wrong with that... i've been counting too many ) and that currency pair value has continuously decreased since it's inception, so i was then wondering what could happen in the future. Can it get to zero? Is that then the end of the pair, etc etc? But yes, it's devaluation would just continue indefinitely to zero, wouldn't it, in theory.

Interesting about the Zimbabwean dollar too. I must have been walking around with my head up my ass these last 5 years, because i'd not even heard about that!

Thanks again!

dirt.
  • #4
  • Jan 16, 2014 4:56am Jan 16, 2014 4:56am
Anyone else have anything insightful to add about using Elliott Waves with currency pairs?
  • #5
  • Jan 16, 2014 11:23am Jan 16, 2014 11:23am
Quoting dirtigr00vz
This thread question arose when looking at the entire history of a specific pair, and not being able to establish a count on the monthly TF right from the start of the pair comparison. I was then trying to bring it back to basics... "so what is the overall sentiment of this pair's wave cycle of the highest degree?"
Perhaps it begs the question of whether predictable wave cycles are even happening at that time fractal, or whether any waves you see at that stage are really just coincidence. The idea behind wave analysis is to put human behavior to paper, to provide a model of what is driving the market.

This is strictly my opinion and not based on any sort of study, but I believe that the effectiveness of wave analysis is built sort of like a bell curve. As you get into the ultra tight time fractals (individual ticks, groups of ticks, seconds, etc.) it's nary effective at all, because the market is for all intents and purposes random at that level. Human behavior in the markets does not aggregate that quickly. Now, on the flip side, as you approach the ultra long-term time fractals (months, quarters, years, etc.) it also loses its effectiveness, because at that level there is too much "forgetfulness" in human behavior for it to be relevant. Of course, you'll still see patterns that resemble waves on both the ultra short and ultra long time frames, but that's no surprise since patterns are seemingly everywhere, from clouds to tea leaves. The question is whether those patterns represent anything meaningful.
  • #6
  • Jan 17, 2014 10:29am Jan 17, 2014 10:29am
Quoting smittens4212
{quote} Perhaps it begs the question of whether predictable wave cycles are even happening at that time fractal, or whether any waves you see at that stage are really just coincidence. The idea behind wave analysis is to put human behavior to paper, to provide a model of what is driving the market. This is strictly my opinion and not based on any sort of study, but I believe that the effectiveness of wave analysis is built sort of like a bell curve. As you get into the ultra tight time fractals (individual ticks, groups of ticks, seconds, etc.)...
Indeed, that was certainly my thinking for small time frames (to me, anything below 1 hour is too noisy, based on my own empirical research), but I hadn't actually considered it for the larger time frames. Up until very recently, the highest time frame i'd analysed was the Monthly, over a 20 year period, which didn't/doesn't seem too bad to me. Only recently (a day or so before starting this thread) have i started to use quarterly/yearly time frames, and obviously i immediately ran into some problems/confusion with the EW counting; hence the thread i suppose...

Personally, looking at charts with higher quarterly/yearly time frames, i barely see any wave flow that conforms nicely with the EW principle and certainly nowhere near as perfectly as 4hr/daily/weekly seem to do. I'm heavily inclined to agree with your interpretation of this.
  • #7
  • Jan 17, 2014 11:01am Jan 17, 2014 11:01am
Quoting dirtigr00vz
{quote} Indeed, that was certainly my thinking for small time frames (to me, anything below 1 hour is too noisy, based on my own empirical research), but I hadn't actually considered it for the larger time frames. Up until very recently, the highest time frame i'd analysed was the Monthly, over a 20 year period, which didn't/doesn't seem too bad to me. Only recently (a day or so before starting this thread) have i started to use quarterly/yearly time frames, and obviously i immediately ran into some problems/confusion with the EW counting; hence...
I use EW in 80% of my fx trade decisions, the best advice I can give you on this matter is to consider what it is that you want from EW in regard to your trading and do not just become a counter which can rapidly become an occupation of little pay.

To clarify, what is the benefit of decoding and understanding every fractal move, instead consider what would be useful to know for trading scenarios and seek just that information
  • #8
  • Jan 17, 2014 11:36am Jan 17, 2014 11:36am
Quoting MaxDoom
{quote} I use EW in 80% of my fx trade decisions, the best advice I can give you on this matter is to consider what it is that you want from EW in regard to your trading and do not just become a counter which can rapidly become an occupation of little pay. To clarify, what is the benefit of decoding and understanding every fractal move, instead consider what would be useful to know for trading scenarios and seek just that information
Is there a time frame range that you would consider noisy or unusable?

I'm currently using EWs to give me a good idea of where the market is going, with candlestick price action to determine my entry points. I'll then use Fibonacci retracements/predictors coupled with Support and Resistance levels to determine my potential Take Profit areas. I'm fairly new to trading (4-5 months) so i'm sure there are plenty of other things i can be doing to improve my trading, but at the moment i'm having some good success with this method. I've only been swing trading with this method, usually having an open trade for 2-10 days.

How about you? Do you use EWs for trading on any time frames?
  • #9
  • Jan 17, 2014 11:55am Jan 17, 2014 11:55am
Quoting dirtigr00vz
{quote} Is there a time frame range that you would consider noisy or unusable? I'm currently using EWs to give me a good idea of where the market is going, with candlestick price action to determine my entry points. I'll then use Fibonacci retracements/predictors coupled with Support and Resistance levels to determine my potential Take Profit areas. I'm fairly new to trading (4-5 months) so i'm sure there are plenty of other things i can be doing to improve my trading, but at the moment i'm having some good success with this method. I've only been...
H1 and above rarely below because there is not enough profit in it.

Happy to discuss in more detail with you but stuffed for time now, catch up next week

regards
  • #10
  • Jan 17, 2014 11:59am Jan 17, 2014 11:59am
Quoting MaxDoom
{quote} H1 and above rarely below because there is not enough profit in it. Happy to discuss in more detail with you but stuffed for time now, catch up next week regards
Sure thing. Have a good weekend.
  • #11
  • Jan 17, 2014 1:33pm Jan 17, 2014 1:33pm
Quoting dirtigr00vz
Is there a time frame range that you would consider noisy or unusable?

I'm currently using EWs to give me a good idea of where the market is going, with candlestick price action to determine my entry points. I'll then use Fibonacci retracements/predictors coupled with Support and Resistance levels to determine my potential Take Profit areas. I'm fairly new to trading (4-5 months) so i'm sure there are plenty of other things i can be doing to improve my trading, but at the moment i'm having some good success with this method. I've only been swing...
Well for trading 4-5 months only, I think you're off to a great start (regardless of whether you've been successful yet). It sounds like you're attempting to understand the market itself and how it ebbs and flows instead of trying to fit it into some curve-fitted mechanical model which can be automated to make _insert silly amount of money_ a day while golfing in the Caribbean.

For myself, I use three charts for analysis-- D, 4H, H. On these charts I do a loose wave analysis (I do count but not strictly based on Elliot methodology, and as MaxDoom said you don't want to become a "counter"), along with basic traditional pattern analysis (e.g. triangles, h&s, etc.). I also use fibonacci retracements and extensions as guidelines for analyzing what the market is doing and where it may be headed. Once I've got a good idea of where I want to be and see a price level that interests me, I drill the H chart down to 15 or even 5m, and wait for generally one of two things on this chart: an excessively volatile move opposite of the direction I want to trade (what looks like a wide range bar on 5m will not be so drastic on H which is really the fractal I'm trading, and these volatile moves on smaller time frames tend to come near the end of trends), or clear indecision / turnover (re: pin bars and similar). I'm somewhere between a day trader and swing-trader in that I'm looking to pick tops and bottoms but only hold them for a few hours, so once I'm in a move, I use some basic volatility analysis to give me guidelines for exit.

To give a basic example, let's say we're in a low range environment (the EURUSD has been recently-- pretty standard for Dec - Jan) and it's generally pushing out moves between 50 and 80 pips on a daily basis. If the daily low was 1.3000, and I'm entering on leg 2 of an uptrend at 1.3020, I know that at the very least price will likely reach 1.3050, but probably not exceed 1.3080. So I'd be looking to exit once I see signs of exhaustion in this range.
  • #12
  • Last Post: Jan 19, 2014 12:11pm Jan 19, 2014 12:11pm
First thing you need to know about Elliot Wave is "the wave structure is more important than the actual wave count". I can tell by reading your posts that you still have not mastered this trading discipline. During the first 3 years of trading i tried every strategy under the sun and not until my 5th year of trading did i realize i had enough experience to actually use Elliot wave theory. Its like giving a civilian a M-16 and then giving a battle field seasoned Marine a M-16. They both can fire the weapon but one will perform better under pressure because he has more field experience. Elliot works the same you can't really appreciate its simple genius until you have put your time into the market and learned a thing or two. Elliot works for every market as long as you have trained yourself to recognize all the patterns cataloged by R.N Elliot. Its more than just counting to 5 and A,B,C. You then need to arrange under market pressure in your mind the probabilities of alternate counts and then take positions according the the rules and guidelines of Elliot wave.
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