If you have been trading for a while, you must have heard about the Elliott Waves. Elliott Wave Analysis originated in the stock market but it applies to the forex market really well too. Elliott Waves are a sort of a crystal ball that can help you understand the coming turning points in the market with surgical principle.

Elliott Waves were discovered by Mr. Elliott when found a certain price pattern repeating over and over again in the stock market on the longer term. However, Elliott waves is a fractal concept that works on all time frames from day trading to swing trading and position trading.

An Elliot Wave Cycle comprises of eight waves that are used to describe a market move from bullish to bearish or from bearish to bullish. Five of these waves are in the direction of the main trend and are called the Impulse Waves. The remaining three are against the direction of the main trend or counter to the main trend and are called Corrective Waves. This eight wave cycle is repeating in the market over and over again.

Now each wave is a smaller sub wave on the wave structure adhering to this 5/3 rule meaning 5 impulse waves and 3 corrective waves. So, each wave pattern exists in the context of a larger wave pattern as well as encompassing smaller wave patterns.

Wave one is the shortest impulse wave. Wave two is a corrective wave that should never reach the start of the wave one.

Wave Three is the strongest and the largest impulse wave. Traders are now more willing to start thinking about the new trend and if it is an uptrend, massive buying starts pushing the wave up and up. Of course, if it is a downtrend, massive selling will start pushing Wave Three down and down. Wave Four is corrective and Wave Five is the peak of the bullish or bearish sentiment in the market.

A five wave pattern on a five minute chart may only count as a single wave on the daily chart. In the same manner, a five wave count on the hourly chart may only constitute a single wave on the weekly chart. But the important thing to understand is that this principle works on all charts whether intraday or longer term. Good Luck!

Mr. Ahmad Hassam has done Masters from Harvard University. Get these 3 Swing Trading Systems FREE. Master these highly profitable Candlestick Patterns with this FREE 82 page PDF Candlestick Guide.