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Basics Of Elliott Wave Analysis

Elliott Wave is a technical analysis technique based on the principle that market tends to trade in rhythmic patterns. Elliott Wave analysis makes it easy to identify patterns which in turn help you produce more accurate forecasts.

Do you often find yourself in a position where you are uncertain whether to let a trade run longer or exit it because you do not know where exactly the price is within a trend cycle? This happens to many traders because most technical analysis tools we use are based on market behavior (i.e. lagging indicators) and for obvious reasons these tools lack the ability to identify the position of current price point within a trend cycle.

Imagine being able to tell how far a trend could follow in a certain direction, it can make a whole lot of difference to your trading performance and this is what differentiates Elliott Wave from most other commonly used technical indicators.

Contrary to popular belief you do not have to be an expert in order to efficiently incorporate Elliott Wave with your market analysis techniques. A little time spent in learning the basics of Elliott Wave can reap you huge rewards and it will enable you to trade with more confidence.

Understanding Elliott Wave Principles
Elliott Wave Theory states that each trend cycle consists of two parts called Impulsive wave and Correction wave. Impulsive wave is driven in the direction of a larger trend and is composed of 5 waves numbered 1, 2, 3, 4, 5. Three of these waves (i.e. wave 1, 3 & 5) move strongly in the trend direction and two waves (i.e. wave 2 & 4) are retracements. The other part of the cycle, correction wave, is the retracement of a larger trend and is composed of 3 waves labeled with the letters a, b, c.

Each wave is a part of a larger cycle and is consists of a very similar cycle of which it is part of. This means that Elliott Wave analysis is equally significant for all timescales and its application to your charts can be expected to yield same results whether you are an intraday trader or a position trader.

Applying wave principle to your charts can be the most challenging task. However, there are few rules that must never be overlooked in order to indentify a valid pattern. Some of the most important rules are:

  1. Wave 3 is never the shortest wave.
  2. Wave 2 never moves beyond the point where wave 1 started.
  3. Wave 3 is never the shortest of 3 impulse waves (i.e. wave 1, 3 & 5).
  4. Wave 4 never moves into the wave 1 area.

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So You Made a Mistake in Trading

So you have taken a loss. Okay, let us say you have taken an astounding loss. What now? It is not the end of the world. Now comes the part where you rise above the colossal mistake you have made in forex trading.

Owning up to it.

Know you have made a mistake and it is a fact. Stop blaming anything or anyone else. Owning up to a mistake is the start. The sooner that you realize that mistakes can be made and will be made, then the sooner will you get back into the game.

Learn from it.

Now what went wrong?  Got it? Good. Every mistake is a learning experience. Even if the reason you realized is your own arrogance, greed, or some flaw in your calculations or in your strategy, there is something to learn. At least you know what not to do next time. The forex market is not as unforgiving as you might think. It is a place of chance and opportunity.

Try a new path.

Now you know the flaw in your strategy, reassess if you would change that part alone or totally try a new path. Failure gives us the chance to look at our plan from afar, to give us a bigger picture. If the problem seems to be your fear of losing or a system that does not fit you, you can easily see a better and new approach once you open your mind to them.

Assess the effects of the mistake.

What are the changes from your previous situation? You may find that you are not that worse off after all. You might be overacting a bit about the situation. However, if the mistake really has far-reaching effects, then better to list them. This way, you can asses which effects can be remedied and which you can do nothing about. For example, you may have lost some investment, but if you can see chance of recovering it, you will discover if it is feasible or not by listing the pros and cons.

Systematize more.

Perhaps you lacked discipline before. Then now is the best chance to wake up and make a solid system where you will base all your decisions.  Learn the tell tale signs of the errors you have made so you can avoid them. Not only will a systematic approach make you more confident in making trades, but also lessen the work you normally do.

Rise up.

I know it is easier to say, but really best thing to do is be stubborn and get back in the game. They do not call forex trading the perfect marketplace for nothing. If there is currency dropping somewhere, then there must be a rise somewhere too.  There is always a chance for profit. Think that if your tread the balance of taking the right risks and being conservative at the right time, then success is not too far.

As a last thought, think about the fact that you are not alone. Somebody else somewhere has made a mistake before you. In fact, those who have tripped are probably the ones enjoying success now. They have learned their lessons from failure. They have shrugged off the stigma of a loss based on just one fatal mistake. Forex trading is difficult and challenging yes, but you are always welcome to try again and again.

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