I don’t usually expect to discuss the Forex markets or indeed Elliot Wave Theory when I go to order my regular fix of Peking duck, but last weekend, when I entered into the local Chinese restaurant, I walked straight into a heated debate on global currency wars.

In the time it takes to rustle up some crispy duck, chop suey and beef with pak choi (the house speciality), Michael, the usually mild-mannered proprietor, lambasted me on the relative merits of Chinese economic policy over Indian policy, and about the negative press China had been receiving last week.

He has a point – we hear very little in the media about the extent to which China has opened up its currency, the Renminbi.

In the past six months, the Chinese authorities have loosened the Renminbi’s dollar peg, they’ve opened up currency trading with Malaysia, and allowed an Indonesian company a $50m credit line in Chinese Yuan. Plus, they’ve even allowed hamburger chain McDonalds to issue $29m of debt in Hong Kong – a first by a western company.

Is it diplomatic pressure from G20 members that’s achieved this?

Is it heck.

Internal economic pressures are at work here. China – the world’s export powerhouse – is overheating. By practicing their own programme of money-printing, China is fueling inflation and a bubble in housing and stocks.

In the long term, it’s hard to see the value of the Renminbi going down – there is little question that it’s significantly undervalued.

The problem for investors is how to get access to this growth.

At the moment, unless you’re a Hong Kong resident (who can buy up to US$2,600 a day of Renminbi), your options are limited to funds.

However, the turbulence this is causing in the Forex markets offers up some great opportunities for Forex traders – and I hope to explore some of those over the coming weeks.

Can Elliot Wave Theory help your financial trading?

I received an email this week about Elliot Wave Theory…

“Hi Steve,

I keep seeing articles on Elliott Wave Theory, but I’m having a lot of trouble understanding it. How do you work out what’s a wave, what’s a sub-wave? Moreover, just how useful is it? Can it really help with my trading, or am I wasting my time here?
Thanks, Jason”

I’ll be honest with you – the words “Elliott” and “wave” send shivers down my spine. It’s the Marmite of the trading world – you love it or hate it.

Personally – I just cannot get to grips with it. I know traders who swear by it, and I’ve tried many times to get my head around it: 5-waves, ABC waves, wave extensions, waves within waves – locating the starting point of these waves all seems very subjective. Where do you start your count?

What is Elliot Wave Theory…

In its simplest terms, this is what your Elliott Wave looks like:

As we know, prices don’t move in straight lines. And according to Elliott Wave theory, it moves in recognized patterns based on traders’ psychological reactions to the market.

You have a 5-wave pattern in the direction of your trend – these are called the impulse waves

And you have a 3-wave (ABC) pattern against the trend – called corrective waves.

With me so far? Good

Then we get our “waves within waves” …

And our waves within waves within waves …

Around about now I start shifting uneasily in my chair and looking for the exit.

Perhaps it’s just something to do with the way my brain works (or doesn’t work), and I’m not saying here that you shouldn’t investigate further if you think it could help you – I know many traders who find Elliott waves helpful in predicting market direction.

What I will say is this: any technical analysis you apply to your trading needs to be clear in your mind so that you can apply it quickly and easily. If you need to spend hours pouring over your charts for confirmation of your signal – chances are the opportunity will have passed you by. That’s why I like to stick to the simple stuff, like moving averages and support and resistance levels – and I find it works for me.

If you think that Elliott wave theory might be for you, and you’re interested in finding out more, there are some excellent resources (most of them free) that were uncovered some time ago by Dave Evans of What Really Profits – and you can find them on this website through the search facility.

I’d be very interested to hear if you have any successes with Elliot wave theory, so let me know how you get on. This old dog may learn some new tricks yet!