This oscillator was designed using the Elliot wave theory which specifies that a price trend is usually represented by a three or five wave sequence of advances or declines. The waves are mainly generated by crowd psychology and again you will achieve more success if you display this oscillator on trading charts using the daily time-frame or higher.
The basic premise of the Elliot Wave Oscillator is that trading sentiment fluctuates from optimism to pessimism in a natural sequence which creates waves in price movements. These oscillations produce the patterns that are illustrated in the following chart.
The Elliott Wave Oscillator is presented as a histogram that represents a 35 period moving price average that is subtracted from a 5 period moving price average. As the above diagram illustrates, this histogram fluctuates above and below a zero line. The Elliot Wave Oscillator can assist you in performing the following tasks:
- You can minimize losses if price reverses direction quickly.
- You can deduce when the next price correction is due.
- You can quickly determine if you should trade long or short.
- You can forecast when trends are about to terminate.