Black Swan Capital applies Elliott Wave theory in its analysis of the currency markets. We consider it a very important tool within our technical arsenal. Our objective in applying Elliott Wave is to help us to identify low risk entry points, price projections to establish profit targets, and appropriate exit points for our trading recommendations.

Elliott Wave is a theory and integrated system—described by R. N. Elliott--that supports our belief that markets are based on and driven by human action, in short sentiment.

Our analysis of markets is based on observations of group behavior—market sentiment--that manifests in price movements. In studying the emotional state of a market (sentiment), and applying Elliott Wave theory, we are at times able to project future price moves with a higher than normal degree of probability and do so independently of fundamental information.

The Elliott Wave Principle is based on a belief that markets unfold according to a basic rhythm or pattern of five waves in the primary direction and three waves that act as a correction. The primary waves are known as impulse waves and are numbered 1, 3, and 5, while the corrective waves are labeled 2 and 4. For this sequence, wave 1 is corrected by wave 2, wave 3 is corrected by wave 4, and the entire sequence is corrected by the sequence a, b, c.

It sounds simple, but it’s not. That’s because there are hundreds of rules and guidelines for proper application of Elliott analysis. And it’s why there are varying interpretations of the same patterns among those that apply Elliott Wave. A major movement—or impulse move—unfolds according to the patterns of five waves, after which the entire pattern is corrected by a pattern of 3 waves in the opposite direction.

Diagram 1 Click to zoom.

You can see from this simple diagram above, the basic fractal unit that is then built up to form a bigger picture. Thus, 1, 2, 3, 4, 5, a, b, c become waves 1 and 2 respectively of the next larger degree pattern. The Wave Principle is interesting in that it recognizes the fractal nature of price structures. Minor fractal wave patterns are also seen in the larger waves over the intermediate- and long-term. Thus, minor waves 1 – 5 complete a wave of higher degree (1, 3 or 5). This can be seen in the diagram below.

Diagram 2 Click to zoom.

Bracketed numbers or letters e.g. -A- or -5- represent a projection and are subject to change as the wave count unfolds.

Diagram 3 Click to zoom.