Key Takeaways
- The Elliott Wave Theory uses patterns to predict crypto market trends and price movements.
- The accuracy of predictions using the theory contrasts. While it’s subjective to newcomers, it reflects market patterns for expert traders.
- Traders use the Elliott Wave Theory to identify two phases in cryptocurrency trading: The motive phase for price advancement and the corrective phase for retracements.
A global overview of what’s happening in the market at any time is one of the best ways to plan your crypto trading activities. While technical analysis is complex for most people, using available tools can make what was initially tricky and easy to understand. This article discusses one such tool, the Elliott Wave Analysis, and gives you an idea of how to use it.
What Is the Elliott Wave Theory?
Elliott wave theory is a technical analysis tool developed by Ralph Nelson Elliott in the 1930s. The professional accountant noticed that financial markets moved in a repetitive pattern caused by an underlying crowd psychology based on greed and fear. He concluded that the market moves in upward and downward trends and published his findings in the book “The Wave Principle” in 1938.
Crypto traders can use the Elliott Wave Theory to understand market trends as it suggests market prices can display predictable patterns over time. The patterns, known as waves, are influenced by investor tendencies and can be identified in the market’s trending and reversal phases. According to the tool’s subjective theory, there are two main types of market movements: impulse waves showing the market trend and correcting waves showing corrections and trend reversals.
The Role of Elliott Wave Patterns in Crypto Trading
Regarding crypto trade, the Elliott Wave Theory provides valuable insights into price fluctuations. The theory has a curved structure showing impulse and corrective waves that help investors understand and anticipate price movements. In this scenario, when a corrective pattern is observed on a long-term chart, it could point to a bearish trend. On the other hand, a shorter time analysis could suggest an incoming impulse wave pointing towards a bullish phase.
The approach described here shows how the theory can provide predictive insight into crypto market movements, highlighting the broad pattern of trader social behavior in financial markets. In this case, a complete cycle has two phases: a motive phase that pushes the price forward and a corrective wave involving price retracement. The motive wave is identified using numbers, while the corrective phase is marked using letters.
The volatile crypto trading market makes the Elliott Wave Theory an integral tool for anyone interested in making informed investment decisions. With the most basic understanding of this theory, a trader can effectively identify an emerging trend for their selected cryptocurrency based on the phases appearing across different time frames on price charts.
Key Concepts of the Elliott Wave Principle
The Elliott Wave Theory is signified by a five-wave advance followed by a three-wave decline. The five-wave pattern includes:
- Three motive waves that are labeled as 1, 3, and 5
- The three are intermingled with two Corrective Waves that are labeled as 2 and 4
- On the other hand, the subsequent three-wave pattern consists of:
One corrective wave labeled as A
- A Motive Wave, labeled as B
- A Corrective Wave, labeled as C
You must learn to locate the patterns within a market price chart to apply the Elliott Wave Principle to the cryptocurrency market. The wavy nature of Elliott Waves means users can observe it using different degrees of trend, from minute-by-minute fluctuations to long-term market trends.
The Meaning of Impulse Wave Patterns
Impulse waves symbolize the main trend direction and can be described as strong upward or downward momentum. In the crypto market, impulse moves coincide with significant price movements resulting from market sentiment, increasing crypto adoption, and fundamental factors.
There are five impulse waves represented by 1, 2, 3, and 5 that move in the direction of the primary trend.
Wave 1: This is the initial move up. This wave typically involves a few market participants and marks the beginning of a trend when most investors aren’t sure about the looming price changes.
Wave 2: This points to a Pullback but doesn’t exceed the start of Wave 1.
Wave 3 is usually the most substantial and extended, often coinciding with high volume. This period is mainly reflected in most traders gaining courage and joining the trend with a surge in participation.
Wave 4: The consolidation will generally stay above the high of Wave 1.
Wave 5 refers to the final push in the trend’s direction. This is when latecomers and investors start pouring in, driven mainly by the fear of missing out (FOMO). Note that the wave will almost always be followed by a significant ABC price correction, proving a much-needed better buying or selling opportunity.
The best exemplification of an impulsive wave pattern could be the late 2020 to early 2021 Bull Run, where you can easily map the impulse wave pattern. Wave 1 started in October 2020 when Bitcoin broke past $12,000 for the first time, but Wave 2 saw a price correction that pushed the price back to $10,000. Wave 3 became an explosive phase that made the price of BTC surge to over $40,000 by January 2021. A Wave 4 consolidation phase followed, bringing the price down to $30,000, eventually leading to an all-time high of approximately $64,000 in April 2021.
The Meaning of Corrective Wave Patterns
The Corrective waves are usually short-term price retracements pushing against the primary trend. Regarding cryptocurrencies, corrective waves comprise a significant upward improvement corresponding to market corrections and profit-taking.
Three fundamental corrective waves, A, B, and C, typically move against the trend.
Wave A: This is usually the initial move against the trend.
Wave B: Refers to a short-term move back in the direction of the primary trend.
Wave C: This is the final move against the trend and will mostly match the length of Wave A.
For perspective, consider the corrective wave following the all-time-high peak experienced in 2021, when prices declined to about $26,000. This represents Wave A beginning August 2023, when the price dropped to $25,200. Wave B attempted to create a crypto rally to the cost of $28,000 within the next few days but was followed by Wave C, which pushed the price of Bitcoin further down to the $24,000-$25,000 levels in September.
How to use Elliott Wave Theory while Trading in Crypto
It may be difficult for beginners to identify the Elliott Wave Theory patterns when using it initially. While they are a perfect portrayal and a visual pattern of the crypto market movements and price prediction, there are a few rules users need to observe when using the Elliott Wave Theory in trading crypto. These include:
- Wave 2 will never retrace all the gains of Wave 1.
- Wave 3 will almost certainly be higher than wave 1 and never shorter than Waves 1, 3, and 5.
- Wave 4 will always be lower or equal to Wave 1 as it will likely retrace all of Wave 1’s gains.
Traders should, therefore, apply the theory to do the following:
- Discover whether or not the primary trend consists of a Bullish or Bearish wave
- Label the waves correctly to visualize patterns.
- Use other trading indicators alongside the Elliott Wave Theory to read crypto market charts.
The lengths of the waves are called degrees, meaning that their duration isn’t regulated and can last days, weeks, months, or years.
The Pros and Cons of the Elliott Wave Theory in Crypto Trading
There are positive and negative sentiments associated with this technical analysis tool, as outlined below:
The benefits and drawbacks associated with this technical analysis tool and philosophy are outlined below:
Pros
Comprehensive Framework: The Elliott Wave Theory offers traders a holistic view of the crypto market, considering all economic factors within a wave pattern.
Predictive Potential: When used correctly, the theory can offer foresight into what traders can expect regarding prices and provide a strategic edge.
Risk Management: Users can quickly identify potential reversal points and set stop-loss orders to manage risk more effectively.
Cons
Complexity: The Elliott Wave Theory is complicated and can be subjective, and traders sometimes end up with varied interpretations
Time-consuming: Traders willing to use the theory must invest sufficient time learning how to apply it correctly and accurately.
Inflexible to Rapid Market Changes: Elliot’s theory can miss out on unforeseen news or economic events that can cause a rapid market shift and lead to inaccurate wave predictions.
Conclusion
The Elliott Wave Theory can offer traders a view of what to expect from cryptocurrency market movements due to investor behavior. While it can be intricate and require a deep understanding, it can empower discerning traders with information that can help them navigate the nature of the crypto market using waves that can help them anticipate looming price changes. While traders can receive valuable insights from the Elliott Wave Theory, successful crypto trading requires combining additional analytical methods like fundamental news, fundamental analysis, and other analytical tools. When doing your market analysis, consider the crypto market’s unique characteristics, such as high volatility and susceptibility to regulatory developments.
