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Trading Lessons

Here's What Makes Elliott Waves a Useful Forex Tool

InvestorEducation / Forex Trading Nov 04, 2016 - 03:59 AM GMT

By: EWI

InvestorEducation

Some Elliott wave forex traders do watch the news -- but for different reasons

Last Friday, EURUSD rallied strongly. Said Reuters:

"The U.S. dollar tumbled against a basket of major currencies...on U.S. political uncertainty after the FBI said it would review more emails related to Democratic presidential candidate Hillary Clinton's private email use."

It's true that the euro rallied after Friday’s news. But we pointed out in our October 21 story that Elliott wave patterns had already been calling for a bottom, if only a temporary one.


EURUSD didn't get there in a straight line -- in fact, on October 25, it made a slight new low for the move at 1.0850. But from there, it surged strongly, and by the time the Clinton news hit the wires last Friday, the pair was well off the lows. In other words, the news came at the end of the rally, not the start of it.

Which brings up this question: What gives Elliott waves the ability to warn you about trend changes before the news? The answer begins with a conversation about what the markets’ true driver is.

Every single day, the mainstream finance makes the connection between the markets and the news. Even when the market move doesn't fit the news, they still tie them together -- by using the word "despite":

  • "Despite strong earnings reports, stocks fell on Wall Street today," or
  • "The dollar rose despite a weaker-than-expected jobs number."

Sounds familiar, doesn't it? News or no news, you still come away thinking that A caused B.

The problem with this approach is... well, there are several. One, as we’ve just discussed, the markets often defy logic. Two, you're always left to play catch up: You wait for the news; you watch the market react; and only then do you try to jump on the moving train, so to speak.

Even if you take a guess and open a position before a scheduled new report, you're still at the mercy of market's reaction -- which, again, is far from being logical 100% of the time. (Look at the U.S. stock market, for example: It's now traded flat for two months, "despite" tons of news stories, good and bad.)

Here's the reason why Elliott waves help you cut through this fog: Waves track market psychology, which goes where it goes before the news; regardless of the news. That's why even those Elliott wave forex traders who watch the news do it for different reasons than everyone else:

  1. Elliott wavers often keep an eye on the schedule economic releases because often, they will mark turning points which Elliott wave price patterns already warned you about.
  2. The news often convey an extreme in market sentiment. For example, if you keep hearing over and over that "everyone hates the euro right now," that tells you that the market's collective psychology is reaching an extreme; everyone has already sold their euros. And if at the same time your Elliott wave analysis tells you that yes, the market is about to reverse, you can use those "extreme" news stores as a contrarian indicator.

Do Elliott waves always work? I wish; what does? But because prices often do follow the Elliott wave model, when you forget about the news for a day and watch price patterns instead, the results might surprise you.


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This article was syndicated by Elliott Wave International and was originally published under the headline Here's What Makes Elliott Waves a Useful Forex Tool. EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

About the Publisher, Elliott Wave International
Founded in 1979 by Robert R. Prechter Jr., Elliott Wave International (EWI) is the world's largest market forecasting firm. Its staff of full-time analysts provides 24-hour-a-day market analysis to institutional and private investors around the world.


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