Wave analysis is the basic part of the technical analysis of the Forex market. In the basis of the wave analysis is the concept of the wave itself. Look at the Forex price chart of any currency pair. What do you see? Movements of prices are not going in only one direction. Price, after a long recovery always decreases and vice versa. This visual feature of Forex market movement allows us to distinguish the waves, which form the market movement. Wave is a one-way direction of the price.
In theory, the wave analysis can distinguish several types of waves:
4. Vertically upwards
5. Vertically down
A very important point in the identification of waves for the analysis is the manner of its distribution on the Forex price chart. The theory of wave analysis highlighted a number of ways: on closing prices at the maximum and minimum prices, or on average. As practice shows, for the novice trader the best way of distinguishing waves on the chart is uniting of the maximum with the minimum and a minimum with a maximum Forex price. In this case, the wave marking becomes very clear, and a newbie Forex trader learns to analyze the waves very quickly.
This method is very simple and allows you to make the first conclusions on the situation in the Forex market very quickly. Over time, any trader can easily identify the beginning and end of the wave, that’s why this technique is universal and the most preferable.
In the theory of wave analysis the important moment in the Forex price movement prediction is the notion of full price cycle. Full price cycle is an upward price movement, after which it always goes down. As a result, the Forex market price never goes straight, it is sure to rise after it goes down. As a rule, that wave, which lies in the direction of the dominant trend, called the current wave, and wave that moves against the trend is called resistance.
Sometimes you can see that a wave is formed not by a single price movement but with few movements of up or down. It is easy to detect the hesitating motion within each wave. This phenomenon has been called fractal waves. A fractal of the waves is that large waves generally consist of small waves.
You don’t have to know all the wave theory in order to be able to analyze the Forex market and trade successfully. One of the main thing you should treat seriously is the wave distinguishing. Wave marking is a method of applying the basic types of waves and wave models in the chart. Depending on the level of the wave, it should be counted in different ways, in order not to be confused and have a clear understanding of market movements. You should remember that each wave has its own meaning in the price movement.
To sum it up, when studying the basic questions of the wave theory, we can identify the following important items that every Forex trader needs to know:
1. It is better to mark the waves according to the maximum and minimum values of the price
2. Waves have fractals, whose essence lies in the fact that the waves of higher level can contain waves of lower levels, which form the model, obeying the general rules and principles of market movement
3. Each wave has its own marking that is different from the waves of smaller or larger levels.
I hope that this article was helpful and you can start analyzing the charts better.