Elliott Wave Analysis and Candlesticks
In this article on Elliott Wave Analysis and Candlesticks, some of the shortcomings of Elliott Wave Analysis is presented as well as how these shortcomings can be overcome by using Candlesticks chart analysis.
First up, one of the major shortcomings of Elliott Wave Analysis is identifying quickly the turning points or price reversal of an index or stock. The signal comes a little late as the waves can only be counted and labelled accurately after the waves are complete and the trend has reversed.
Elliott Wave Analysis and Fibonacci Numbers
Usually, traders who use Elliott wave analysis would use Fibonacci numbers to identify potential turning points. But, there will always be a few potential turning points as there are many Fibonacci numbers such as 0.382 and 0.618. Due to this, it is difficult for the trader to accurately pin point a turning point.
This is the reason why signals using Elliott wave analysis comes late. The price would need to move further and form the early phase of a new wave or trend before the signal can be confirmed.
This is illustrated in the below diagram. As you know, Elliott wave analysis encompasses a five wave impulsive wave and is followed by a corrective three wave structure.
The confirmation signal would come in when the price breaks above the high of the prior impulsive wave. But, by then, the price would have moved by a considerable amount.
What if, there is a way to detect end of corrections and beginning of a trend much earlier and closer to the reversal point. That is where Candlesticks comes in.
Candlesticks charting carries four information for each price bar (whether on a hourly, daily or any other time frame). These are the open, close, high and low of the price action as illustrated below. If the price closes higher than the open price, it is a white candlestick. If on the other hand, the price closes below the open price, it is denoted as a black candlestick.
Each of these candlesticks also carry an inherent information about the sentiment of the market participants. Let’s say that the market is undecided. In that case, a candlestick pattern called a doji would form. In a doji, the open and close are at the same level such as the one illustrated below.
A doji by itself only tells you that there is indecision in the market. The candlestick that follows after the doji would tell you which direction the market has decided upon. For example if the market puts in a strong white candlestick after a doji, it is a signal that market has decided in a bullish stand and further gain can be expected.
But not all dojis are the same. It depends on where the doji appears. A doji at the end of a trend and followed by a decision candlestick is a strong reversal signal. A doji may also appear at the middle of the trend and then is followed by trend continuation.
You would need to study and understand candlesticks and what the patterns are telling you and put that in context of the overall market to decide where the market might be headed to next.
Elliott Wave Analysis gives the context of the overall market and Candlesticks provides the all important information of key reversal points. Together Elliott Wave Analysis and Candlesticks forms a formidable set of market forecast tools that would give any trader a major edge in trading the markets.
Hopefully, you have learnt one limitation of Elliott Wave Analysis and how you can use Candlesticks to overcome that limitation. If you are interested to learn more about Candlesticks, do click on the below link which would bring you to a free short video by Steve Nison (the Candlestick guru) where he talks about how you can use candlesticks in your trading to increase your profits and reduce profit leaks.