Wave theory divides price action into five main phases
At the first phase, the trend is barely obvious as only a small number of traders are aware of its emerging potential.
At phase two, there is a small correction, but it never brings prices below the inception point of the trend.
Phase three is the strongest and most powerful, and also drives a large number of bystanders into the price action.
Phase four is the ensuing corrective phase, and phase five is the final, bubbling phase of the trend where everyone is bullish and massive amounts of capital enter the market. Phase five is followed by a collapse which ends the trend.
Deciding where each of these phases begins or ends is mostly a matter of intuition. As such, there are no generally accepted methods, and each trader will sooner or later improvise his own techniques for determining the time frame of a trend.
The main advantage of the Elliott Wave Theory lies in the organisation and compactness that it grants to the chaotic and price action by re organising the market patterns into an easily understood hierarchy, the Wave Theory allows greater precision in trade decisions, increasing the trader’s confidence, All these make it possible to formulate more sophisticated and advanced strategies in trading while still keeping the necessities and implications.
One of the big advantages of using the Wave Principle when trading: you can increase your understanding of how current price action relates to the market's larger trend.
Other tools fall short in this regard. Several trend-following indicators such as oscillators and sentiment measures have their strong points, yet they generally maturity of a trend. Moreover, these technical approaches to trading are not as useful in establishing price targets as the Wave Principle.
A wave theorist will divide the price pattern into several sub-patterns and consider trade opportunities on the, the fractal nature of the price action enables the application of the theory at any timeframe.
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