Crypto Academy Week 14 - Homework Post for [@fendit]. Elliott Wave Theory

This week has been an outstanding session of learning and understanding new concepts in cryptocurrency and how they are backed by theories and tools. In my homework post, I have tried my level best to answer all the questions with my concepts that can be helpful for my dear colleagues.

Q. 1. What’s the application of this theory?

p
It is very important to know the use Elliot’s wave theory and where to use it. This theory is applicable to trace price fluctuations in crypto market by a keen technical analysis. Although this theory is itself a technical analysis. This theory is used to identify impulse waves that demonstrate a pattern and analyze larger trends that are opposed by corrective waves.
Elliot’s wave theory has proven to be an effective technique to assess market upward trends and predict that what can happen in future in terms of value. It is because, market shows recurring long-term price trends linked to persistent flux in sentiments of investors and their mindset. Elliot wave analyzer has shown results up to 84.9% accurate. It also indicates entry points and profit points for traders.
Q. 2. What are impulse and corrective waves? How can you easily spot the different waves?

p
Elliott’s Wave Theory helps to identify different waves that include Impulse waves, corrective waves and motive waves. I will discuss Impulse waves and corrective waves. An important point to understand here is that the theory is subjective, every trader interprets in his own way and likely not to agree with any other trader and it is a good trading strategy.

Impulse Waves

These waves consist of 5 sub waves which go in the same direction as the next largest pattern. They are most popular and the easiest to discover in a market. A structure of 5-3-5-3-5 is formed by impulse waves. In this sequence, 3 waves are motive waves and 2 are corrective waves. These ways enable trends to occur. The price movement is in one direction however bars move up or down.

Corrective Waves

These waves consist of 3 sub waves which go in the opposite direction to the next largest pattern. Corrective waves are also called diagonal waves by technical analysts. Corrective waves are smaller as compared to impulse waves. A structure of 5-3-5 is formed by corrective waves.

Both of these waves are linked to human psychology because it remains constant. Human instincts and innate behaviors are never changing. All humans want large to come and less to go.

Identification of Impulse and Corrective Waves

These waves can be identified by following steps:

a) When we talk about wave 2, it should reach the support level of wave 1.

b) However, wave 3 should not be shorter than wave 5 and wave 1 instead it should be longer.

c)In case of wave 4, it is should be shorter than wave 2.

d)And wave 4 should reach the resistance level of wave 1.

Q. 3. What are your thought on this theory? Why?

I believe that this theory is subjective. Everyone interprets in his own way. It is useful for some but some don’t consider it useful. Yes, we can say that the more you know the more you grow. Same it applies here, the more technically we figure out market trends by observing waves, the more we can get precise results. If I talk about myself, this theory tells me where I stand like at how much risk. Once I have observed the patterns, my risk situation is clear to me before I enter trade. Sometimes, 2 or more patterns can occur, so we have to be fast and mark the changes. Before I decide profit target, I have to fix my stop loss so that I can know when to get out of trade. I would say success rates in Elliot’s theory are average. It is because sometimes we are sure of a pattern, but it ends up opposite. We can never confirm that what could happen unless it completes and next starts to form. At last, I would say it is a game of logical reasoning and endurance. One should have a backup if it doesn’t work.

. . . . . . . . . . . . . . . . . (B) . . . . . . . . . . . . . . .

coin chart

Now I will demonstrate impulse and correct waves on my coin chart that I have taken from my Binance application.
I am analyzing trends for BTC/USDT.
screen taken from binance

In the above demonstration, I interpret wave 1, 2, 3, 4 and 5 as Impulse waves and A, B, C as corrective waves. As we can see that waves 1, 3 and 5 show upward trends while waves 2 and 4 show a downward bearish trend. According to the characteristics of corrective waves, wave A and C show a downward trend and wave B indicates an upward bullish trend. Corrective waves are following the sequence 5-3-5 (Zigzag order) while Impulse waves are 5 sub waves as we can see above following 5-3-5-3-5 sequence. The 3rd impulse wave shows the longest length as per Impulse wave rules. In corrective waves, the C wave has the longest length and waves A and C are bearish. This coin chart indicates both impulse and corrective waves.

Conclusion

I have keenly observed and studied the pros and cons of Elliot’s Wave Theory and I would say that this theory depends on how we interpret it. However, we can predict our risk situation and observe market trends linked to investor psychology. Yes, it can beneficial if we use other technical indicators to understand market trends. I believe it will be more helpful in gaining precise results.

Cc:-

@fendit
@sapwood
@steemcurator02