The best method of analysis for forex trading is to use the Elliott Wave Principle. It was developed by Gerald P. O’Driscoll and Ralph Nelson Elliott in the early 1900s, but it has been refined over time. The basic premise behind this principle is that market prices follow a series of waves that move in five-wave patterns. These waves are labeled A, B, C, D and E on an 8-5 scale . Each wave consists of three subwaves known as impulse waves I1, II2 and III3.



Elliott Wave Theory was developed by Ralph Nelson Elliott who published his work in 1929 under the title New Concepts In Stock Market Analysis: A Study Of The Wave Principle In Prices And Prices Only . His original intent was simply to show how prices could be analyzed using Fibonacci numbers but he soon realized that there were other patterns within these price movements that could also be identified with this same method. He then expanded on his initial findings into a complete system of analysis known today as Elliott Wave Theory.

How Does This Work? As you can see from the chart above, wave A consists of three impulse waves. The first wave is a 5-wave move that lasts for approximately one month. The second and third waves are 3-wave moves that last for about one week each. These two subwaves are labeled I1 and II2 on an 8-5 scale (see below). The basic premise behind Elliott Wave Theory is that market prices follow five distinct waves in a sequence known as a “five-wave pattern” or Fibonacci sequence. Each of these five waves must be at least 2 1/2 times the length of the previous wave to qualify as part of the current trend. In other words, if you can identify three impulse waves with equal lengths within a larger moving average, then this will define a new trend direction based on the Fibonacci sequence (see below). Another way to look at this is by examining how far each impulse wave extends beyond its predecessor (see below). This allows you to gauge where it might end up going next. If it does not extend much further than its predecessor then there is little chance that it will continue moving in the same direction for very long before reversing course and heading in another direction altogether. However, if it extends significantly farther than its predecessor then there is more reason to believe that it may continue moving forward into infinity… . The waves of a five-wave pattern are labeled I1, II1, III1, IV2 and V3. The first wave (I) is the shortest and typically lasts for about one day. It is followed by an intermediate impulse wave (II), which lasts for about three days. This is followed by the longest of all impulses (III), which can last as long as two weeks before giving way to another shorter impulse wave (IV). Then comes the final fifth wave or “fifth force” that can last anywhere from 2 1/2 to 3 months before it gives way to another smaller 5th wave or “fifth force” that may continue moving forward in time until it finally ends up completing its full cycle at some point in the future.