Understanding patterns in crypto trading is crucial as it helps traders predict price movements. When we discuss patterns, we should not limit the scope of the discussion around the general patterns like triangles or head-and-shoulders. Every serious discussion about advanced patterns starts from the topic of Elliot Wave Theory. What do you know about this concept? Even if it’s the first time that you hear this name, don’t worry. In this lesson, we will discuss everything you should know about this amazing pattern.
Let’s start the discussion from the concept of ‘Waves’.
As you know, the crypto market is highly volatile, so it never moves steadily. ‘Waves’ refer to the recurring patterns of price movements that can be observed on price charts. These patterns are not smooth or steady but rather consist of phases of intense buying or selling (upward or downward movements) followed by periods of price correction (reversals or adjustments).
Do waves follow any specific pattern? Yes, they do. At least, that’s what the Elliot Wave Theory suggests.
As per the theory, market price movements follow a repetitive pattern of five waves in the direction of the main trend (up or down), followed by three corrective waves.
These waves help traders predict future price movements by identifying where an asset is in this pattern.
The Elliott Wave Theory was developed by Ralph Nelson Elliott in the 1930s. Elliott, an accountant turned researcher, found that markets move in predictable waves during both up and down trends. He shared his insights in the book “The Wave Principle” in 1938.
The Elliott Wave Pattern consists of eight waves in total, grouped into two sets of five and three.
The first five waves, labelled 1, 2, 3, 4 and 5, follow the market trend, with waves 1, 3, and 5 driving the price up or down vigorously.
The last three waves, labelled A, B, and C. represent corrections after waves 5. A and C are larger corrections, while B is smaller.
Identifying the Elliott Wave Pattern is simple. You just check whether a pattern fulfils the below given golden rules or not.
The Elliott Wave Theory reveals how market psychology influences crypto trading.
Afterwards, a correction (ABC) offers better prices.
To use the Elliott Wave Pattern in crypto trading:
Look for patterns of price movements on crypto charts
Label them as 1, 2, 3, 4, and 5 for the upward trend and A, B, and C for the correction.
Ensure waves relationships adhere to the Elliott Wave Rules, such as not retracing more than 100% or wave 3 being the longest.
Use these patterns to make informed decisions on buying, selling or holding crypto assets, considering both the impulse waves and correction waves.
The Elliott Wave Theory, developed by Ralph Nelson Elliott in the 1930s, provides a structured framework for understanding market behaviour. It recognises the repetitive nature of price movements in the form of waves and offers valuable insights into market psychology. By identifying and applying these wave patterns in crypto trading, investors can make more informed decisions, anticipate price movements, and navigate the volatile crypto market with greater confidence.
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