This is a theory that was created by a smart man named Ralph Nelson Elliott. Basically when the average person and trader look at the market, they see just chaotic trading. Sometimes it goes up and sometimes it goes down. Obviously there is reaction to specific stimuli, but if there is no stimuli, than it’s really hard to predict directions. Ralph noticed that there was some patterns to it and that the behaviors of the market were actually predictable.

Basically he noticed that there would be stimuli that would inevitably lead the market in an upward or downward direction. But you could also break down these movements into waves. When you look at an upward movement, it never goes straight up. It goes up and down a little and back up. It’s much more rigid, but there appears to be a pattern to this.

Take a look at the wave. This is what I mean. But let’s break it down…

1: This is basically the first initial rise on some sort of stimuli. Let’s say it is announcement in the news that is a good thing for whatever currency we are looking at.

2: People that have already had a trade before the initial rise decide that things have gone up far enough to get out and make their profit, so there is a slight sell off.

3: This is the longest part of the wave, but this is when the trading gets picked up by the mainstream and they start getting it. This is the case where your friend tells you there is a good buy in whatever.

4: Again, people sell off to get some of their profits. It’s just that old savings; profits today are better then maybe more profits tomorrow.

5: This is the last part of the movement up where some people try to get in before it’s too late.

This is basically the Elliot Wave Theory in a nutshell. You should be able to take the theory by Ralph Nelson Elliott and apply it to a downward trend too. This is very typical behavior for currencies trades, so start paying attention to it.