Does Elliot Wave Work on Gold?

Elliott Wave Theory is a method of market analysis which seeks to recognize patterns in price movements. It’s founded on the belief that markets are driven by collective psychology and that market shifts manifest themselves through repeating patterns.

This theory divides price moves into impulse waves and corrective waves, with each wave having its own characteristic pattern that can be identified on a chart.

Wave 1

Investors enter an impulsive phase where they invest in gold as an undervalued commodity due to positive fundamentals, low interest rates, a strong dollar, or general perception that gold is undervalued.

The initial wave can often be the longest of all and lasts an extended period. Investors tend to overbuy when initially experiencing higher surges but may then quickly sell in order to book profits from this initial surge.

Traders should watch out for a zig-zag correction during this wave that does not retrace more than 61.8% of their gains from Wave 1. Furthermore, it must project 161.8% of Wave 2, as per the Rule of Alternation.

Wave 2

Though Elliott Wave theory seems best suited for forecasting stock price movements, commodities like gold can also provide useful data through Elliott Wave theory. Gold tends to reflect investor optimism or pessimism which can be predicted using this theory.

Wave 3 typically features positive news, leading to investor optimism and increasing demand. Prices typically surge quickly while corrections tend to be shallow and short-lived. As this wave is impulsive in nature, it should never overlap with Wave 1, in fact it must extend past it by an equivalent ratio (1.618:1). Furthermore, Wave 3 must never be the shortest amongst the first three waves, nor should it retrace more than 100% of its previous peak peak price.

Wave 3

Gold trading is an emotionally charged market, making it ideal for Elliot Wave analysis. This theory seeks to predict market movements by understanding traders’ underlying emotions – knowledge which could bring consistent profits on this asset alone or when combined with other commodities.

Elliot provides traders with rules they can use to assess the value of a commodity, such as his alternation rule. This ensures waves have clear progression in their patterns without overlap and ensure smooth progression over time.

Elliott believed that markets moved in repetitive cycles determined by investor psychology. These cycles produced small rises and declines, known as waves, that he thought could often be predicted.

Wave 4

Wave 4 typically appears when investors perceive that the market has been overpriced and prompt a sharp sell off to retrace Wave 1’s high point.

As per Elliott Wave theory, prices should not reach new heights during this correction and investor volume should remain relatively low. Furthermore, wave 4 cannot overlap with wave 1 according to this theory.

Elliott waves use Fibonacci principles to place the constant up and down movements of markets into discernible patterns that can help predict price action. Unfortunately, Elliott wave analysis is subjective, making identifying when one wave starts or stops difficult; therefore smart drawing tools such as those found within our City Index platform may come in handy here.

Wave 5

Elliott Wave theory relies on a set of rules and guidelines that detail how market participants respond to price movements. Although these rules don’t need to be strictly adhered to (80-90% reliability is considered adequate for trading), they provide valuable insights for traders.

These guidelines can be divided into two groups: major and observational. Major guidelines cover specific waves while observational guidelines cover more general topics.

The most widely followed observational rule for waves 4 is that they should never retrace more than 38.2% of wave 3. Wave 4’s tend to be sideways affairs with decreased momentum and volume reduction as evidence of corrective phases.

Raymond Banks Administrator
Raymond Banks is a published author in the commodity world. He has written extensively about gold and silver investments, and his work has been featured in some of the most respected financial journals in the industry. Raymond\\\'s expertise in the commodities market is highly sought-after, and he regularly delivers presentations on behalf of various investment firms. He is also a regular guest on financial news programmes, where he offers his expert insights into the latest commodity trends.

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