Crypto Academy Week 14 | homework post for @fendit | Elliott wave theory | by @loveth01.

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Application of Elliot wave theory (EWT)

How can I applying the Elliott Wave Principle? By beginning from its most basic level, the Elliott Wave Principle is only achievable when patterns in market prices have been fully and well identified. This means that, we start by analyzing waves on a chart very carefully.

Elliott’s pattern is made up of two waves which are impulsive waves and corrective waves. An impulsive wave is made up or consist of five subwaves. The direction of it is the same as the trend of the next larger size. A corrective wave is sub divided into three different subwaves. It moves in a direction which against the trend of the next larger size. these basic patterns together form five and three-wave structures of increasingly larger size.

In a chart which contains waves 1, 2, 3, 4 and 5 together complete a larger impulsive sequence, that may be labeled as wave (1). The impulsive structure of wave (1) tells a trader or an investor that the movement at the next larger degree of trend is also upward. It also warns a trader to expect watch out for a three-wave correction which maybe a downtrend.

That correction, wave (2), may then be followed by waves (3), (4) and (5) to complete an impulsive sequence of the next larger degree, which previously as been labeled as wave 1. At that point, again, a three-wave correction of the same degree can be seen, and which can be labeled as wave 2.

So, in applying the Elliott Wave Principle, the first and the most important thing to do is to look at charts of market action carefully and look out for any completed five-wave and three-wave structures, it is only when this is done that a person can interpret where the market is and where the market is likely to go.

Anytime we are applying the Elliott Wave Principle to any chart, an important point must be noted which: the Elliott Wave Principle does not offer certainty about a market outcome but , it does give you an objective means to find out the probability of a future direction for the market. At some points, two or more valid waves interpretations does exist. So, it is paramount for any investor or a trader to assess the probability of each interpretation carefully.

A trader should see the Elliott Wave Principle as his road map to the market and his investment idea as a long journey. He'll begin the trip with a specific plan he has made up in his mind, but some unforeseen circumstances which he may encounter along the way may force us to want to change his course. Here is an adage that says Alternate ways can just be ordinary side roads but sometimes they end up being the best path to follow by a passenger.

Another valid way of applying the Elliott Wave Principle is in the Fibonacci ratios. A quite number of investors and traders realize that Fibonacci analysis of the markets was pioneered by R.N. Elliott. The use of Fibonacci ratios needs an Elliott wave interpretation as a beginning point. There are two important two insights as regards to Fibonacci relationships in a wave. First of all, is the corrective waves that tend to retrace prior impulse waves of the same degree in Fibonacci proportion common wave relationships include 38%, 50% and 62%. And lastly, is the impulse waves which have similar degree within a larger impulse sequence will tend to relate to one another in a Fibonacci proportion.

Wave interpretation rules and Fibonacci relationships together are kinds of powerful tools that is used to establish investment strategies and also reducing an exposure to risks. When the Elliott Wave Principle is applied investors are helped to decide where to go in, where to go out and at what point should he give up on a strategy. And therefore, the Elliott Wave Principle makes it possible for him to know and be sure of the highest probability direction for a market.

IMPULSIVE WAVE

An impulse wave pattern is a technical trading term that defines and shows a strong movement a financial asset's price which also coincides with the main direction of an underlying trend. It is used mostly in discussion of the Elliott Wave theory, as a method of analyzing and predicting financial market price movements. Impulse waves are used to show an upward movement in uptrends and/or downward movements in downtrends. Impulse wave pattern is used by investors and traders in technical analysis that confirms the direction and movement of market trends with short-term patterns.

CORRECTIVE WAVE

Corrective waves are an essential component of the Elliott Wave Theory, that was formulated by a man called Ralph Nelson Elliott in the 1930s. Corrective waves are a set of financial asset price movements that are associated to the Elliott Wave Theory of technical analysis. Within a wave pattern, impulse waves move in a direction which have trend at one larger degree while corrective waves move in the direction that is opposite to that. Corrective waves are consist of three sub-waves.

ANALYSING BITCOIN (BTC) PRICE

looking at the chart above

The arrows pointing down are showing bearish in the price of the asset
In the beginning, the price was going down and some traders will rush to buy it at that time because of the decrease in the price of the asset.
Towards the end of the third arrow pointing upwards, the price of the assest starts increasing;
The downward arrows are showing bullish signal, there will be an increase in the price of the asset because the value of the asset has increased and traders who sell at this time will make a massive profit selling at that time.

In conclusion,

To know Elliot wave theory well you must learn to understand the impulsive and corrective wave well.

Thanks to professor @fendit this is my homework post.