Elliot Wave theory was developed and popularized by Ralph Nelson Elliot in the beginning of the 20th century. Yet, traders stay vague about this theory. Some are absolutely sure about its efficiency; the others do not think so. Nonetheless, nowadays this method is very popular, while Elliot Waves are the key instruments for many traders. Moreover, Elliot theory is considered to be the basis of technical analysis on Forex.
According to Elliot, crowd behavior is cyclic and has an ordered system. The term «crowd behavior» is applicable to Forex society, for this reason trading is affected by some patterns as well as prices are affected by traders’ reactions to outside influences. Elliot discovered the following emotional chain which is true for both traders and prices: expansion – enthusiasm – euphoria – recession – depression.
Thus, the price movements can be represented on the chart within 5 waves, three of which are impulsive moving with the trend, while two of them are corrective moving against it. As a rule they are marked as 1, 2, 3, 4, and 5 on the chart. When the price action is down, it is possible to observe a pullback which is labeled on the chart as A, B, and C waves.

In order to maximize the profit, it is better to follow these rules:

• the longer the impulsive waves are, the longer the corrective ones are
• it is very important to distinguish the corrective waves from the impulsive ones before opening a position.

Wave identification is one of the most important and at the same time very complicated stages of wave analysis. If you have succeeded in identifying these waves, you have already gained half of the success. The one thing left to do is to take a potentially profitable wave and close the trade on time.
Good luck with trading!

Added by Andrey Misyuk,
InstaForex Clients’ relationship manager