Elliott Wave Principle Applied To The
Foreign Exchange Markets by Robert Balan
The modern foreign exchange markets date from the early seventies and the eventual breakdown of the Bretton Woods and Smithsonian Agreements on fixed parities. As from 1973 the currencies of the major “free” industrialised economies began to float freely against each other. For the rest of that decade the forex markets were in what is best descibed as their juvenile phase of growth; full of uncertainty and inexperience with varying degrees of liquidity. The markets were dominated out of London and New York whilst the Far-East was a distant third. In general, investors and corporates considered the market to be highly speculative, somewhat illiquid and definitely irrational.
With the arrival of desk-top computing power in the early eighties teclmical analysis and chartism began to make a significant appearance in the Forex markets. The initial reaction of most seasoned traders then, and even by many now, was one of scepticism. These market were considered to be highly unpredictable. The need was for experienced and proven dealers; the thought of technical models that could rationalize the market price action and regularly predict with any accuracy the future movements could not be taken too seriously. This somewhat egotistical approach was in hindsight made more out of ignorance and perhaps with a touch of arrogance rather than from any real understanding of the markets' dynamic fundamentals.
Over the last eight years much has changed. The forex markets now operate fluidly on a 24 hours a day basis from the Monday moming opening in Wellington, New Zealand, until Friday's evening close in New York.
More significantly the U.S. stock exchange crash of October 19th, 1987 demonstrated the legitimacy of the forex markets to be considered not only as the largest, but also one of the most liquid and transparent markets. Amongst banks, investment houses, corporates, institutional and private investors there is now an overriding awareness of the need to dynamically manage their currency exposure and that this management has to be on a continual basis. As this awareness has grown, so has the demand for increased research and analysis into the dynamics of currency movements. lt was from this development the laws of probability and market psychology began to be applied, it is these parameters that form the basic framework of chartism and technical analysis.
The “touch” of the successful “spot” forex trader is in his ability to rapidly rationalize market movements and in the speed ofthe implementation of those trading decisions. These stem from the trader's experiences of repeated market pattems and the inbred feeling of having been there before. In reality the trader is individually and independently analysing the market place as to whether a currency is “overbought” or “oversold” (price action), what the potential for a market move is (riskl reward ratio) and the likelihood of such a move (probability). These are the main foundation blocks of technical analysis.
Chartism as a part of technical analysis enables a rapid visual analysis of any price action, placing it in perspective of the current market trend. This allows for a relatively easy and early recognition of important trading levels. Most dealers now accept resistance and support levels derived from analysing chart pattems, but many do so without appreciating the fundamental concepts behind them. This latter approach is a somewhat fragile one on which to base trading decisions.
Trading decisions using chart pattems and price projections should always be supported by some form of probability analysis on the potential for such a move and also its likely timing. This combination allows for a strong and reliable technical support of trading and investment decisions. It is from this that the decision-maker should then look for the catalyst event that could trigger the movement. The Elliot Wave Principle as with technical analysis in general can not predict economic announcements, but it does recognise with some exactitude the state of the market and the probable price action in response to those statistics or decisions.
The Elliott Wave Principle is exactly that, a principle, but it does endeavour to place the overall market move as well as the short-term wave structure into an order. The primary objective is to establish the presence of the most destructive and thereby the most profitable wave fonnations, be they a 3rd Wave or a C Wave. The application of the Principle is not infallible but when its applied correctly it is overpowering in its market inte|'pretation as well as its success. Above all the Principle accepts implicitly the technical chart patterns used by other systems whether terminal or consolidatory. It is not an altemative, but it places chart formations such asa“l-lead and Shoulders” structure intoalarger orderof events andawider perspective.
'I`urning to the author, Robert Balan, l haveover the last few years seen his concepts take shape, reach a maturity tl1at in the forex market is remarkable. His success rate both in the strategy and thc timing of trades have given rise to hundreds of avid readers throughout the trading world to his published daily market commentaries. One either embraces the tools that can underpin trading decisions or ignore them at one’s own peril. The success of Robert's commentaries clearly demonstrate the respect his analysis commands. Above all, he has the humility to accept a flawed analysis as a fact of life. This book endeavors to show the guidelines and the values that he has developed over the past 12 years in the practical application of the Elliott Wave Principle to the foreign exchange markets. Some of these insights and guidelines are probably unique to Robert's interpretation ofthe Elliot Wave Principle and offer the fact that principles and theories are not inviolate but will over time be advanced from their original concepts.
Michael Salt.
The book is divided into eight parts.
Part I is a general introduction to Elliot Wave analysis and the foreign exchange markets. It outlines the difficulties and possibilities inherent in wave analysis. A brief background is provided.
Part II describes the fundamental concepts of Elliott Wave Analysis. The basic pattems, and their more common variations, are provided in easy-to~compare illustrations. Provided too, are the most common pattem combinations found by thc author in real-time analysis over the past twelve years.
Part III is devoted entirely to deviations from the normal wave relationships, both in terms of ratio, and in form. Examples of substitution of simple patterns by complex ones are also shown in never-before- published illustrations.
Part IV outlines the most common practical guidelines and other observations that should be of value to anyone who is just starting out on wave analysis. Even veteran wave analysts may fmd the insights provided in this extensive body of tips and comments useful and informative. Part V also provides practical tips to the wave analyst who finds the going rough - especially when he or she is stuck with multiple scenarios and has trouble defining the options available.
Part VI outlines atypical Elliott Wave Trading Plan from the initial stages of the traditional tive-wave sequence, through its final corrective Stages, illustrating various optimal trading strategies.
Part VII provides real examples of trading situations written by the author. Daily comments have been assembled into case studies which can be applied for future events.
Part VIII concludes with some insights into the future of wave analysis, including the study of chaos and disorder, the application of fractals and recursive patterns, and other recent works on non-linear dynamics.
Details are in the free ebook.
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