The currency markets have a reputation for being unpredictable, and as such, they can easily confuse retail novice traders, price pairs fluctuate up and down, have unexpected violent spikes, and market trends can reverse for what appears to be absolutely no reason. Traders often wonder how such movements occur and how they can identify the factors that drive them. More importantly, they wonder how they can make a consistent profit when trading in such conditions. I believe wave analysis is one of the most effective trading strategies which can answer these questions. In this article, I’ll explain the premise of wave analysis, its history and ties to technical analysis. So what is wave analysis?
Before I provide an explanation of what wave analysis actually is, it’s important to identify what causes the price of a currency pair to change. Price is influenced by a country’s long-term macro-economic data and its political environment. These factors can affect the culmulative psychology of all the participants in the currency markets. It’s important to note that one trader alone will never be able to influence the price of the market - it’s the collective average psychology which makes price action bearish, bullish or choppy. Wave analysis, also known as Elliot Wave analysis, is a trading method which allows traders to recognise and identify culmulative market psychology. The methodology is named after Ralph Nelson Elliott, who discovered that upward and downward trends of mass psychology occur in repetitive waves. History has proven this to be true, that’s why I believe wave analysis is one of the most effective trading strategies a Forex trader can master. The Elliot Wave principle
The Elliot Wave principle is the theory behind the wave analysis methodology. The wave principle suggests that market prices behave in specific patterns - known as wave patterns - which are influenced by the forecast of supply and demand.. Put simply, the sum moods of investors form a collective investor psychology or crowd psychology, which influences price movement and the patterns they repeatedly make. Traders can then use the Elliot Wave principle to analyse financial market cycles and forecast market trends, simply by identifying extremes in investor psychology along with highs and lows in prices. It’s important to recognise that wave analysis should actually be considered as a branch of technical analysis, whereby the analysis uses visual tools on price charts.