How to Use Elliott Waves in Trading
Example on the Euro Dollar
(Article written on August 19, 2022)
For this analysis, which has an educational purpose, I will apply the Elliott theory by exposing some principles. The goal is either to introduce you to Elliott waves, or to show you how it can be applied without going into too much detail.
The Elliottist count often gives rise to much controversy. The confusion comes from the fact that Elliott’s theory is not there to ensure what will happen but to give a course. It’s a bit the same difference that exists between the map and the territory.
As a reminder, an Elliott formation is made up of 8 waves, 5 trend components and 3 correctives.
So from the high point of 2021 we have a first wave which ends in November with a low point at 1.1186 with a length of 1080 pips followed by a corrective wave II in 3 stages which is similar to a consolidation horizontal. According to the theory wave II did not fully retrace wave I.
Wave III was then set up shorter in time but steeper and wider with a drop of 1145 pips. Elliott’s rule that wave III cannot be the shortest is then respected.
The corrective wave IV then develops, it retraces precisely 38.2% of the III, which is very academic since it is the ideal Fibonacci ratio for a wave IV.
I will now break down wave V which itself must be divided into 5 waves. According to this count, we are in wave 5 of the V, which should see the end of the euro dollar’s medium-term decline. Note that sub wave 4 does not penetrate wave 1 to the nearest pip, one of the fundamental principles of Elliott.
The ideal objective is above the support of August 2002 at 0.9623 which corresponds to the passage of the bottom of the bearish channel. Moreover, if we report the height of wave 1, we have an objective at 0.9670, which respects the principle of equality between wave 1 and 3, defined by Elliott. It is therefore possible that the decline of the euro dollar will end in the 0.9620/9670 zone before seeing a significant rebound.
It is not excluded that this wave 5 is shorter and the signal to start a 3-time ABC correction would come from an overflow from the top of the downtrend channel.
EUR/USD technical analysisn daily data: