Fact: Forex markets are just as (if not more) volatile as equities. Trading currencies can be just as (if not more) risky as trading stocks.
Fact: As any seasoned investor will tell you, catching the wrong side of a trend in ANY leveraged market can be especially disastrous.
Using Elliott wave analysis helps you alleviate both problems: 1) Missing the trend, and 2) Mismanaging risk.
Here is some insight from our Senior Currency Strategist and forex tutorial instructor, Jim Martens, in response to a frequently asked question:
Q: What should one consider when applying Elliott wave analysis to highly-leveraged markets? How does leverage alter the way you count waves in forex markets?
Jim Martens: Leverage is a fact of life in markets. As a result, I do allow for certain movements to become stretched or exaggerated. Unlike non-leveraged markets, I will allow for a proposed wave four to overlap wave two in a leveraged market, but only after I have exhausted all other possibilities and determined there is no other viable wave count.
Here are my conditions for allowing an occasional wave four/two overlap. 1) The wave four structure must maintain its corrective look. 2) My alternate wave count should still point the market in the same direction as my top wave count. 3) In all cases, wave two always retraces less than 100% of wave one, and wave four always retraces less than 100% of wave three.
Of course, adds Jim, in addition to your Elliott wave analysis...
...Timing is everything. That's an old -- and often repeated -- saying, and it's so true. Many market participants want to be in the 'action' all the time. I, on the other hand, have always favored shunning market risk, stepping up only when the opportunity is clearly in our favor, and the risk is pre-defined.
Yes, "the trend is your friend." Yes, proper understanding of Elliott wave analysis and market timing can help you manage risk in forex markets. But there is much more to successful forex trading.
- How to pick the right forex markets that offer the best opportunities
- How to identify trends, countertrends and trade set-ups
- How to time your entry, exits and re-entry with high confidence
- How to set your stop-loss for maximum risk protection
- How to identify 5 key components of a high-probability trade set-up
- How to apply Elliott wave as a trading methodology
At EWI's upcoming LIVE online Intensive Forex Trading Tutorial, Jim Martens and another top EWI instructor, Jeffrey Kennedy, teach you the invaluable skills of successful Elliott wave forex trading. Jim and Jeffrey are two of the best teachers of wave analysis at work today.
Nothing Helps You Learn Faster Than a Good Teacher
Learn to effectively trade forex using Elliott waves from the comfort of your home or office -- join us for this intensive 4-session trading course.
Editor's note: Earlier this month, we shared more tips to forex traders. You can click on the following links to read Part One and Part Two.