Ralph Nelson Elliott gave the Elliot Wave theory that is being widely applied in the forex trading business. When several of the forex traders thought that he stock and the currency trading market was pretty chaotic without any kind of order, Ralph Nelson Elliott put forth the idea across that in reality they were not progressing without any kind of order. He ideally suggested that they followed a pattern and that they were not really chaotic in the way they progressed.
The concept behind this theory is that the decision of the forex traders who are in to online forex trading is being influenced by the emotional response of the investors to the existing situation at any point in time and based on the overall psychology of the traders at that point in time.
The mind set of the forex traders was seen to he up and down; however, Elliot suggested that he wavering attitude of the forex traders was not the same all the time; however, it did trend up and down in a kind of similar way in similar situations and this gave birth to the idea of history repeats itself in forex trading.
Elliot proposed the 5 – 3 wave patterns that he did notice after performing a wide number of researches in to the field. Ideally he proposed 5 waves that are known as the impulsive waves and he proposed 3 waves that were known as the corrective waves.
In a typical 5 wave decision making wave impulses there are 5 different waves that will be considered.
• The first wave that will move in a uptrend is representative and caused by a comparatively smaller number of people who are involved in the trade. Ideally this can be real or an artificially induced situation where the investors are of opinion that this is the right time to buy the currency.
• The second wave that will move in a more uptrend is representative and caused by a more and additional number of people who are involved in the trade. And those who were already in the trade tend to sense that the currency has reached a saturation point or over value and they tend to sell and make some kind of profits. This kind of forex trading takes place with some kind of decent negotiation.
• The wave 3 that is more up has more people in to trade and is indeed one of the strongest trends. There is lot of people buying in and there is a chance for saturation and decline despite the buying being high.
• The wave 4 is ideally risky despite being high with even more number of people because some of them are going to wait to buy when the rates go down over again. This is an expensive purchase.
• The wave 5 is even higher and this is the time when despite the high prices people are maniac about buying not realizing its future prospects. Crowd follows crowd and the wave 5 is created.
Ideally 5 waves are impulsive waves. Three waves where decline is predicted is the corrective wave.
