Most of the trading system based on technical indicators have reliable entry signals but they do not show the perfect moment to exit the market, whether a position is in the money or traders should cut losses in time. The main reason for such an incomplete work of trading algorithms is related to the lagging nature of technical indicators as they all are based on mathematical formulas taking into the account past price action but not future market’s intentions. Some technical analysts use a combination of several tools to get the right answers, however, since the financial markets change trading conditions rapidly, it’s tough to find a mix of indicators with leading nature. Nonetheless, several systems work effectively.
Ralph Nelson Elliot was facing the challenge of creating a theory to explain the market’s movements and deny assumptions that price action is always chaotic. He succeeded to finalize a method in the mid-1920s. By the way, he did not have any computer, software or technology-based automatic trade advisors, as you could guess. However, Elliot theory is one of the most popular codes of market laws, which works effectively nowadays. A separate article is required to explain all of the details, but we won’t waste your time right now as all of the information can be easily found on the web. The only useful conclusion about Elliot’s theory is that technical analysts developed an Elliot Wave Oscillator (EWO). The mathematical formula takes two moving averages (34 bars and 5 bars periods) and compares the difference between them in the scope of changing momentum, close and high/low values, subtracting the longer MA with the shorter one, etc.
EWO is the primary indicator in this trading strategy, but as you already might know, any indicator needs additional tools to smooth false spikes and avoid fake trading signals. In this case, we’ll talk about a combination of ADX and DI indicator (period 13 bars, threshold 20) and 9-bars Simple Moving Average as such secondary technical indicators. Best market conditions to trade with Elliot Wave plus ADX and MA Forex Trading System is sideways range, while perfect currency pairs are cross-rates as they move like waves in most cases. EUR/GBP is the most heavy-volume traded cross-rate, thus it’s the most liquid and predictable pair among others. Any timeframe longer than 15-minutes is suitable.
Enter conditions to open long positions are as follows. The current price has to breach SMA9 from below. EWO histogram has to start edging higher. ADX mainline has to turn upside, while the final trigger comes when -DI and +DI lines cross each other or EWO turns positive after being below zero (any signal which comes first). We take profits from long positions when one of the following signals occurs: current price drops below SMA9, or EWO histogram starts edging lower, or ADX mainline reaches a local peak. Conditions for short positions are same but mirrored as an example below shows.