Hearing names of people famous in financial markets, we most often associate them with traditional areas such commodities or stock markets. However, modernity dictates a new reality: today most traders work in the foreign exchange market, or forex, which significantly differs from traditional markets in a number of respects. The main difference is the timeframe under analysis. Analysis in commodities or stock markets is carried out on weekly, monthly and even yearly charts, while the forex makes it possible to monitor currency fluctuations even within one minute or tick intervals. This means anything discovered for the stock market very often has to be transformed so it can be used in the forex.
Patterns described by stock market classics often fail within one day, while working on at least a weekly chart requires too many financial resources and a significant stop-loss.
Hence we work on intraday charts often trying to use rules applicable for the monthly timeframe. Surely, many stock market strategies have been transformed and rethought over the years the foreign exchange market, forex, has been around but often such transformations were made chaotically, by different traders and during different periods.
Stock market analyst Robert Balan stands out as a person whose significant piece of writing describes peculiarities of how the Elliott wave theory operates in the forex market.
Robert Balan already has a host of followers of his trading strategy. He became interested in the forex and Elliott wave theory as early as in 1977 when he, an engineer and businessman by education, started applying it to the stock market. However, a little time later Robert started adding his own computer-based technical models to Elliott’s ideas. He worked for a long time as a consultant on stock and commodities markets as well as markets of futures, precious metals and, eventually, the forex.
Later R. Balan fully switched to analysis of the foreign exchange market and daily publication of his overviews in business editions of the Philippines. In 1985 he was invited to take a consultancy position with the Treasury and Forex Department at Lloyds Bank, Hong Kong, and was later reassigned to its Geneva-based branch as a Vice-President for Technical Analysis. There he published his daily comments in such agencies as Reuters and Telerate. In May 1989 Balan joined the branch of the Swiss banking corporation in London as a Technical Analyst of the Financial Markets Research Department in the Laboratory of the Treasury and Trading of Capital Markets. His daily comments and results of market analysis are published on SELL pages of SELL by SBPQ of Reuters.
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He wrote a book, Elliott’s Wave Principle, which is unique not only in that the author adapted Elliott wave theory to the most rapidly evolving forex market, but primarily in that Robert Balan developed his own trading strategy based on the classical wave theory. The book has a lot of the author’s own inventions that he stumbled across when working with the forex market.
This is about a number of deviations from normal wave correlations which often come up on intraday charts and are much less frequent on daily and monthly timeframes.
Anyone who has at least some superficial knowledge of Elliott wave theory should known the wave structure and main principles he relied on when developing his theory.
1) Main movement turns round according to a five-wave structure which is ‘corrected’ as a whole by a three-wave structure in the opposite direction.
2) The five-wave structure is usually called an impulse. This move shows in what direction the chart has an overall tendency. Corrective waves help the whole movement regain balance before the chart continues movement in the direction of the impulse.
3) When there is a new, higher wave level, the 1-5 wave sequence becomes one senior wave.
4) This wave structure is valid for a chart of any timeframe, starting from one minute to monthly timeframes.
In addition, Elliott laid out three inviolable rules for his wave structure.
* Wave 2 never breaks the basis of Wave 1.
* Wave 3 cannot be the shortest of ‘impulse waves’.
* Wave 4 cannot enter the zone of Wave 1.
If any of these rules is broken, this sequence isn’t an impulse by nature.
Both Elliott and Robert Balan call Fibonacci figures an additional criterion important for analysis of where a wave starts and finishes. This is primarily important when defining the most likely point where the impulse wave is over. Fibonacci figures are dealt with in a separate chapter of Balan’s book.
However, it isn’t that simple and logical in the real chart as it is in drawings. There are a number of variations, deviations, additions and untraditional patterns that come along with the main move as the nasty truth about the forex is that it wants to prevent prediction of the right move by most traders.
Elliott described a number of such deviations both for the impulse and corrective movement. His works describe such structures as an extension, formation of a diagonal triangle (expanding or narrowing), the structure for the ‘fifth wave failure’ (where wave 5 cannot break the peak of wave 3) etc.
The corrective movement, according to Elliott, has many more options and is, as such, more complex. Elliott and Balan warn how difficult it is to appropriately recognize correction. The reason is that corrective structures are more variable than impulse waves. Sometimes, the corrective nature of the movement becomes obvious only after the structure has already formed and is a matter of the past.
Balan showed and described a few basic forms of corrective waves.
* Basic forms: zigzags, flat corrections (flats), irregular corrections and triangles.
* Complex corrective forms: double threes and triple threes. They are split into three categories, namely zigzag complex, flat complex and irregular complex.
However, in the following chapter R. Balan already says that different deviations are more likely in price charts than traditional wave structures. Many of deviations he describes are his own discoveries.
In particular, the analyst says there are two types of possible deviations:
The first type results from a deviation in mathematical proportions between parts of the wave structure.
The second type includes deviations where simply corrective structures are replaced by complex ones which makes their identification much harder, like appropriate analysis and forecasting.
It is only constant monitoring of the chart’s movement that can help the trader learn to identify such deviations and define their value for analysis.
Therefore, patience and perseverance you need to appropriately select relevant patters are crucial qualities of a successful trader in the forex.
Other important features that Balan points out after many trading classics include:
- flexibility, the ability to change your tactics in a permanently changing market without sticking hard to dogmas that have already lost their value;
- absence of a bloated ego that prevents you from seeing your own mistakes and failures;
- peace of mind that stops any wave analyst from hasty (and, as such, often erroneous) decisions;
- passion for trading without which you can eventually lose any interest in this kind of activity and, as a result, your money.
Robert Balan dedicated the last chapters of his book to a very detailed description of his trading plan where he sets out the trading strategy on different timeframes: from short-term trading with the duration of one trade under a day to long-term long-run where positions can remain open for a few months.
Here the author emphasizes how important and sensible it is for each trader to make their own trading plan.
‘When making a trading plan, it should essentially follow what Robert Beckman said: ‘We’re not trying to defeat the market. We’re trying to follow it’. This statement by Beckman has a subtle meaning. You should by trying to be ‘successful’ rather than ‘right’. In other words, don’t try to have right ‘forecasts’ to boost your reputation. You’d better get focused on becoming profitable in a specific trade, even if your forecast was wrong’.
