Markets are ruled by optimism and pessimism, and cryptocurrencies are no exception to that rule.
Elliott Wave theory gets mentioned a lot in the cryptocurrency world. Cryptocurrency trading, more than equity trading, is driven by sentiment and psychology.
The basic idea of Elliott Wave theory is that the markets are controlled by public sentiment and mass psychology. Public sentiment and mass psychology moves in waves within a primary trend and 3 waves in a counter-trend. When a 5 wave move in public sentiment is completed, it’s time for the subconscious sentiment of the public to shift in the opposite direction and start the corrective wave cycle.
In this article we are going to explain the 5 waves of the 5 wave impulse pattern. Keep in mind that this does not entail a completed elliot wave cycle, a complete elliot wave cycle starts with a 5 wave impulse pattern and ends with a 3 wave corrective pattern.
A complete elliot wave cycle will look like this:
The first 5 waves are the impulse pattern where wave 1, 3 and 5 are up and wave 2 and 4 are down. When the impulse pattern completes a corrective ABC cycle will start. The ABC cycle will form a downtrend. When we break the downtrend line (line connecting wave 5 and wave B) we can start a new elliot wave cycle or what we like to call a new market cycle. The elliot wave cycle will then repeat itself.
Now let’s have a closer look at the waves in the impulse pattern:
The coin makes its initial move or pump upwards, breaking the prevailing downtrend and signalling a reverse of trend in the process.
This is usually caused by a relatively big number of people that all of the sudden (for a variety of reasons, real or imagined) feel that the price of the coin is cheap so it’s a perfect time to buy. This causes the volume and price to rise. (volume precedes price)
At this point, enough traders who were in the original wave consider the coin overvalued and start managing their positions, profit taking starts. This causes the coin to go down. However, the coin will not make it to its previous lows before the coin is considered a bargain again by people who missed out on the first wave.
This is usually the longest and strongest wave. The coin has caught the attention of the mass public. More people find out about the coin and want to buy it. This causes the coin’s price to go higher and higher. This wave usually exceeds the high created at the end of wave 1. A set rule within elliot wave theory: Wave 3 cannot be the shortest wave.
Please note: wave 3 does not have to be the longest wave, wave 5 can be longer as long as wave 3 is not the shortest.
Traders take profits because the coin is considered expensive again. This wave tends to be fast and brutal and often retraces to previous major support. (high of wave 3)
People who missed out on wave 1 and 3 are usually still bullish on the coin and are waiting to “buy on the dips.” They will enter when the coin has retraced to a major support area causing the price to bounce and extend into wave 5.
This is the point where most people get in on the coin and is mostly driven by FOMO (fear of missing out). We have now entered the mania cycle. You usually start seeing the coin on the front page of major (crypto) news outlets as “coin of the year”. Traders and investors start coming up with ridiculous reasons to buy the coin and try to choke you when you disagree with them. This is where the coin becomes massively overpriced. Traders start selling or even shorting the coin which starts the ABC or corrective wave pattern.
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