Ralph Elliott, an American market analyst, discovered the basic principles in the 1930s studying the Dow Jones Index. He noticed that when prices move in the direction of a major trend, they take place in five waves, called Waves 1,2,3,4, and 5. Waves 1,3, and 5 are motive waves, while Waves 2 and 4 are corrective waves. When these 5 waves had exhausted, there was a period of retracement of at least part of move made by the 5 waves. These retracements take place in three waves and very often comply with a Fibonacci ratio.
Using this knowledge, it is possible, if you know where the market is in relation to the prevailing wave structure, to forecast (with a high degree of accuracy) the most likely direction of the market! This is invaluable knowledge to a trader, especially when used in conjunction with just one other technical indicator that I use.
Elliott Wave DNA http://www.jennreviews.com/elliott-wave-dna Nikola Delic
I have a chart of a recent move in the Dow Jones Index (on a 5-minute chart). I have identified the start of a 5-wave Elliott Wave move when the momentum indicator shows a positive divergence to the price - a good sign, after a strong down-move - that the market is getting ready for a counter-trend rally.
I wish to trade with the main (down) trend, so I wait for the five up waves to play out. At the same time as the market is making its 5th and final wave, the momentum reading is showing a negative divergence to the price (a very weak sign). This gives me confidence that the rally has played out, and is ready to resume the downtrend.
That is therefore a low-risk place to short the market. You can see that the market did, indeed, resume its downtrend. For a short-term trader, the next question is: Where to take profits? I will leave that difficult subject for another article.
That is how I trade by applying the Elliott Wave Theory in practice - together with a simple momentum indicator. This technique can be used on almost all markets, and I have used it successfully in trading the emini S&P 500, the FTSE Index, Gold, and especially the Euro/Dollar. It can work on any time-frame, and has given me excellent entry trades on daily and weekly charts as well.