On The Wave

Hello, friend!

If you watch the market long enough, then you could see how it transforms into the ocean.

Sometimes I think that it is hard to find a better comparison because the market is also exposed to storms: there might be its hurricanes and flats. Sometimes the boat, which name is "investment", is lifted with a nine wave up to top sky summits, and sometimes it fell deeper into the abyss and smashed on the cliffs. That's the faith of a trader, who looks for its safe harbor in this wildness with optimism for the future.

Now we have this sea and waves talk not by accident. Today we are going to talk about "waves" on the market. In technical literature, this rule got a name of "Elliot waves" because it was discovered during the ocean monitoring. It was seen that some waves are bigger than the others and also they have quite stable connections between each other. Anyway, let's stop speaking and get down to business. If this rule is universal, we can observe it anywhere.

Picture 1. A chart of EUR/USD for 17.08.2018 - 25.12.2018.

In picture 1 we can see a distinct pattern of a wave structure for EUR/USD. Wave structure consists of 5 main and 3 residual waves. All waves are also divided into impulse (the ones, that create a trend), and corrective waves (these pullbacks are movements against a trend).

So, in picture 1 we have "impulse" waves with numbers: 1,3,5, "b", and "corrective": 2,4, "a", "c". Generally, there is no any difference regarding the direction of a trend, so a chart of an upward trend will consist of 8 waves: 4 impulse and 4 corrective ones, as it is shown in picture 2.

Picture 2. A chart of EUR/USD for 24.08.2018 - 31.08.2018.

As we can see in picture 2, the upward trend has the same pronounced structure. However, it is not all of our discoveries. If we look closely at the dates in pictures 1 and 2 when all the actions occurred, then we can see that both of them happened at the same time.

How could two trends exist at the same time on the market?

Nesting of waves is one of the crucial moments, which makes the market so multifaceted that even two persons may speak about the same events happened at the same time, but do not understand each other. In other words, each big wave consists of smaller waves, but with the same structure. And those consist of even smaller waves and so on till the tick based wave structures. Such a situation is handy for any trader, so understanding of a market wave structure is the "must have" instrument for trading assets.

However do not forget about the fact that the observation of a wave structure is a skill that develops over time. So, if you keep practicing, then after a while you will be able to see a structure of waves at any time at the market and transform this observation into earnings.

Now let's check a simple wave trading strategy and discover one more principle of this pattern. The most simple trading take place on residual waves where you can see the complete structure of 5 main waves.

So, it means the following algorithm:

1. We watch the market and look for 5 waves, that can be interpreted certainly;
2. Bet "LOWER" throughout the wavelength of "a" and "c";
3. Bet "UPPER" throughout the wavelength of "c".

However here you may have such question as "how can I understand that now is the moment for correctional waves?"

The thing is that the wave structure has the same number of common and unique characteristics that allow distinguishing one wave from another.

Picture 3. A chart of EUR/USD for the period of 03.01.2019 - 15.01.2019.

If we look at this picture, then we can see the same as on the previous ones: line 5 is the shortest impulse wave here. This can be explained that the wave 5 rises at sunset of a trend, which implies that few people want to buy it. It means that it is the best time to sell at this time (or bet "LOWER"), creating bearish pressure on the market. Also, the wave 5 can be found by the frame of a longer consolidation (wave 4) before its onset. It means that the market almost has no power to push the asset up. Furthermore, it is necessary to have more time to gather everyone.

Usually, at this moment big traders reconsider their views on the asset.