How forex market moves?

how market moves

Is forex market predictable? Can we predict its movements? If we could, we all had been billionaires, but is it really that unpredictable and chaotic?. If that was the case we all should have lost all our money, so there must be something in-between. It can’t be predicted but it certainly moves within some levels we can predict more or less.

Please be patient, everything will make sense if you continue reading. In one of my previous articles I explained why the market never moves in straight line. I moves up and down even if the overall direction of the trend points up and down. Even while in range, the market never shows like a flat line, it moves up and down, it bounces until up and down levels get eventually broken and starts trending again.

In 1930, a smart accountant called Ralph Nelson Elliot discovered what is known today as Elliot waves. He stated that “Because man is subject to rhythmical procedure, calculations having to do with his activities can be projected far into the future with a justification and certainty heretofore unattainable.” It is said that even a monkey can make billions if it trades a very long time using Elliot waves theory.

But why am I talking about Elliot waves? Does the market moves according to them or not? Well, yes and no, please bear with me, I’m not talking about them for nothing, just to fill this page. Your patience will be rewarded.

Long story short, here is an illustration of Elliot waves theory. According to him, the market moves like this:

elliot waves

Elliot waves

Wave 1 represents the inception of the trend, usually after a high impact news.

Wave 2 is a correction of the first wave which never goes beyond the starting point of the first one. Even if the news is still bad, the market retests the previous level but is not strong enough for a real turnaround.

Wave 3 is the most powerful wave, this is the real movement. Retracements are short, the trend is very strong, everyone is now trying to get a piece of the pie, those who hesitated is jumping in feel that now is the time to do it.

Wave 4 is a corrective one, the trend is now almost over, the market ranges for a while until further news.

Wave 5 is the latest one in the direction of the trend. All news are favoring the trend but volume is lower and the market is ready for a real retrace.

Wave A is a corrective one, even if the news are positive, overbought/oversold levels are touched and the market retraces. Slowly, but steady.

Wave B looks like a continuation of the trend after a pullback (wave A) but the volume is much lower than in A. If fundamentals do not longer affect the market at all even if they are positive for the existing trend, then it’s time to stop our trades and reverse.

Wave C represent the actual retracement, the volume goes higher and the market starts to retrace.
Ok, great but the million dollar question is: how can we identify those waves? Elliot gave us three rules:

1. Wave 2 never retraces more than 100% of wave 1, if it does the the market is either ranging or is ready for a real reverse.

2. Wave 3 is the largest of all waves.

3. Wave 4 does not overlap with the price territory of wave 1. If it does, the pattern is broken.

It now seems is not that easy to spot those waves in real trading, but here is my approach:

1. I always pay attention when the market is ranging and the volatility is low. It must behave like this for a few days.

2. When a high impact news occurs, the trend must be strong enough to break the previous day high/low and stabilize at that level for at least a day.

3. I’m now trading the retracements until I notice that even if the news are positive, the trend is no longer affected and the volume drops.

4. I’m now looking for a sweet spot to trade retracements.

Conclusions:

1. Always be careful to high impact news.

2. Be prepared for a failure, the market can break any pattern, that’s why is better not to trade without stop loss. Trading without stop loss is the safest way to lose all your money.

3. If the news are positive but the trend fails to continue, then be prepared for a retracement.

I hope you enjoyed reading my article. If you do, please leave me some feedback, I’d really appreciate feedbacks!