The Elliott Wave Commodities Trading Theory
This is a form of technical analysis that Commodities traders and other investors use to forecast trends in the commodity markets by identifying extremes in investor trading psychology, highs and lows in commodities trading prices, and other collective activities. This commodities trading theory model shows that collective human trading psychology develops in natural trading patterns over time, through buying and selling decisions reflected in market commodities prices.
This trading theory of analysis was developed by Ralph Nelson Elliott that is based on the theory that, in nature, many things happen in a five-wave pattern. These patterns are also applied to technical analysis trading, to analyze the behavior of Commodity Trading market trends using this technical analysis theory.
When this trading theory is applied to Commodities, the assumption is that the commodity market will advance in a pattern of five waves - three up ones, numbered 1, 3 and 5 - which are separated by two down ones, number 2 and 4. When the three up moves(1,3,5) are combined with the two down moves(2,4), they form the 5 Wave trading pattern.
The theory further holds that each five-pattern up move will be followed by a down move also consisting of a three-pattern down moves - this time, three down ones are not numbered but use the letters A, B and C. So as to differentiate them from the 5 ones for the up move.
5 and 3 Wave Pattern
The main commodity trend will comprise five moves while the retracement will comprise 3 moves.
Five pattern (dominant trend) - uses 1, 2, 3, 4, 5
Three pattern (corrective trend) - uses A, B, C
This article is about how to trade online commodity markets using the Elliott Theory as the driving force of commodity instruments. This model relies heavily on looking at commodities trading price charts. Technical analysts use this trading theory to study developing Commodities trends to identify the waves and discern what commodities trading prices may do next.
By analyzing these patterns on a commodity chart and applying the Elliott Theory, commodities traders are able to decide where to get in and where to get out by identifying the points at which the commodity market is likely to turn.
One of the easiest places to see this trading theory at work is in the commodity market, where changing investor psychology is recorded in the form of commodities trading price movements. If a trader can identify repeating patterns in commodities trading prices, and figure out where these repeating commodities trading pattern is relative to the Elliot pattern counts then the trader can predict where commodities trading prices are likely to head to.
Rules for Elliott Count
Based on the commodity market patterns formations formed by this trading theory, there are several guidelines for valid Counts:
- Wave 2 should not go below the beginning of Part 1.
- Wave 3 should be the biggest among Part 1, 3 and 5.
- Wave 4 should not overlap with Part 1.
Five pattern (dominant trend)
1: This one is rarely obvious at its inception. When the first wave of a new bull market begins, the fundamental news is almost universally negative. The previous commodity trend is considered still strongly in force. Fundamental analysts continue to revise their estimates lower; the beginning of a new trend probably does not look strong. Sentiment surveys are still bearish and the implied volatility in the commodity market is high. Volume might increase a bit as commodities prices rise, but not by enough to alert many technical trading analysts.
2: This one two corrects 1, but can never extend beyond the starting point of wave one. Typically, the news is still bad. As commodities trading prices retest the prior low, bearish sentiment quickly builds, and "the crowd" mentality reminds all that the bear market is still in force. Still, some positive signs appear for those who are looking: volume should be lower during 2 than during 1, commodities trading prices usually do not retrace more than 61.8% of 1 part one gains. Commodities Price will reach a low that is higher than the previous low resulting into a higher low.
3: This is usually the largest & most powerful move upward, larger than 1 & 5. The news is now positive and fundamental analysts begin to raise estimates. Commodities Prices rise quickly, corrections are short-lived and shallow. Anyone looking to get in on a pullback will likely miss the boat. As 3 starts, the news is probably still somewhat bearish, & most traders remain negative: but by part 3 midpoint, the crowd will often join in and agree the new market sentiment is bullish. Wave three will extends beyond the highest level reached by 1.
4: This is typically & clearly corrective. Commodities Prices may move sideways for an extended period, & 4 typically retraces less than 38.20% of 3. Volume is well below that of wave three. This is a good place to buy a pull back if you understand the potential ahead for a Part 5. Still this 4 is often frustrating because of their lack of progress in the larger upward trend.
5: This is the final leg in direction of the dominant trend. The news is almost universally positive and everyone is bullish. Unfortunately, this is when many average investors finally buy in, right before the commodities trading price hits the top. Volume is often lower in 5 than in wave three, and many momentum indicators start to show divergences (commodities prices reach a new high but the indicators don't reach new highs). At the end of a major bullish trend, bears might very well be ridiculed, for trying to pick a market top.
Three Pattern (Corrective Trend)
A: Corrections are typically harder to identify than impulse moves. In A of a bearish market, the fundamental news is usually still positive. Most analysts see the drop as a correction in a still active bullish market. Some commodity technical indicators that accompany A include increased trading volume, rising & implied volatility & possibly a higher open interest in short selling.
B: Commodities Prices reverse & move slightly higher, which many see as a resumption of the now long gone bullish trend. Those familiar with classical technical analysis might see the peak as the right shoulder of a head & shoulders reversal commodity pattern. Volume during B should be lower than in A. By this point, fundamentals are probably no longer improving, but they most likely have not yet turned negative.
C: Commodities Prices move impulsively lower. Volume picks up, & by the third leg of C, almost everyone realizes that a bearish commodity trend is firmly entrenched. C is typically at least as large as A & often extends to 1.618 Fibonacci expansion level beyond A lowest point.