How to Use a “Wave Trend Indicator” for Price Swings & Wave Patterns

20 min read

Dear Traders,

Did you ever wonder if there is an indicator that analyses Elliott Waves? Does a “wave trend indicator” actually exist or is it just a myth? And the short answer is yes.

This article reveals the best wave trend indicator and explains how to use indicators for improved price swing recognition and Elliott Wave analysis. We also show how traders can use a simple method for analysing oscillators that drastically improves your accuracy when determining price swings and wave patterns.

Can Indicators Help with Elliott Wave Theory?

Yes, they can. But keep in mind that not everyone agrees. According to Elite CurrenSea and our chief wave analyst, Chris Svorcik, both price action and the oscillator indicator can be of enormous help in understanding the Elliott wave structure. But there is a “dispute” among wave analysts and some believe that indicators do not play any significant role whatsoever.

Whether style you eventually choose, it makes sense to be open to both styles at first and to see which one fits your own analysis and trading the most. Based on your own experience, you can then choose whether you analyse Elliott Waves based on price action only or a combination of price and oscillators.

In this article Elite CurrenSea will share its methods how we use the oscillator for a better understanding, interpretation, analysis, and trade setups based on the wave patterns.

What is the Best Wave Trend Indicator?

Elite CurrenSea uses the Awesome Oscillator as a wave trend indicator. The AO (Awesome Oscillator), which is created by the Elliott Wave expert, legendary trader, and Fractal creator Bill Williams, is in our view the best oscillator for analysing the waves of the Forex, CFD, and other financial markets.

A good second place however is reserved for own proprietary MACD indicator called the macd.PRO. Although there a wide range of wave trend indicators that are mentioned online, the AO and the macd.PRO are two of the most accurate wave trend indicators. We will now explain why.

Benefits of AO and macd.PRO for Wave Patterns

Before we explain the benefits of the AO (Awesome Oscillator) and macd.PRO, we need to identify the problem they solve which is:

What is the definition of a price swing and wave?

Traders must have a clear and logical system of identifying one price swing because without a rules based approach, traders will misinterpret the chart and always be unsure about their analysis. In fact, most traders fail in trading, mastering the waves, and trading the waves because they do not use a systematic method for understanding and reading price swings.

The AO and macd.PRO are both extremely valuable for identifying the correct price swings with a rules based approach. They are also equally valuable in determining wave patterns because wave analysis is simply an analysis of price swings. Once you understand price swing, you will understand wave patterns too.

In the field of Elliott Wave analysis both oscillators provide key information about the exact price swing, wave count, and wave pattern outlook. Here are the three major benefits of using the AO or the ecs.MACD as a wave trend indicator:

  1. Helps identify the correct price swings.
  2. Indicates and confirms momentum and correction.
  3. Labels the wave patterns.

If you do not use the AO or macd.PRO, the problem is twofold when applying a discretionary (and not a rules based method based on oscillators) approach to your wave analysis:

  • Your analysis will be less accurate: identifying a wave without a wave trend indicator is difficult and also time consuming.
    • There are many waves and waves within waves. What is one price swing or wave and can you repeat the same logic on each and every chart day in and day out? In most cases, traders cannot manage this level of consistency.
    • Most traders will not have the required experience to analysis waves without fixed rules. This is especially true for beginners but also for intermediate traders (unless you have a decade of analysing waves under your belt).
  • You will not have sufficient confidence when trading: although analysing the charts might work out fine, trading your wave analysis with actual capital always requires more confidence.

The key to success in analysing and trading price swings and the Elliott Wave Theory is by applying a systematic way of identifying one single wave, which can be done via the AO and macd.PRO.

Identifying the Correct Price Swing

There are multiple solid methods of applying a rules based approach for identifying the correct price swing. One of them is the oscillators, such as the mentioned AO (Awesome Oscillator) and macd.PRO.

Here are the key factors to analyse:

  • The zero (0) line: the key point part of the oscillator is the “zero” line. Every time the AO or macd.PRO bars cross the zero line, a new price swing is in process.
  • Blue or red bars: blue bars indicate bullishness whereas red bars indicate bearishness.
  • Bars versus zero line:
  • Blue bars above the zero line indicates bullish momentum or impulse.
  • Red bars above the zero line indicates a bullish correction.
  • Red bars below the zero line indicates bearish momentum or impulse.
  • Blue bars below the zero line indicates a bullish correction.


With this in mind, we can make the following conclusions:

  • Price is not hitting the zero line recently:
    • Price is in momentum when the AO bars move away from the zero line.
      • Bullish: bars are above the zero line.
      • Bearish: bars are below the zero line.
    • Price is in a retracement when the AO bars are moving back to the zero line.

  • Price is near the zero line:
    When the AO bars are back at the zero line, price has completed an old price swing and is building a new price swing. This means that it has reached an indecision spot:

    • Price is in a reversal if the AO bars are moving away from the zero line after recently crossing the zero line.
    • Price is in a retracement or range if the AO bars go sideways.
    • Price is in a trend continuation if the AO bars continue in the same direction.

How to Find the Price Swing

How do you recognize on the price chart what is the correct price swing when analysing the zero line of our wave trend indicator, the AO or ecs.MACD?

  1. As you now know, every time the AO bar crosses the zero line, a new price swing is valid.
  2. Once this occurs on the AO indicator, traders must analyse the price charts at the same moment as the AO bars are crossing the zero line.
  3. Then look for the most recent top or bottom which is the end of the previous price swing and the start of the new price swing.

As indicated above, the cross of the zero line is key for understanding price swings and wave patterns. Here is an example of how traders can understand the process in more detail.

The above image is an example where we zoomin to one spot of the chart. Let’s now show a chart now which shows a larger piece of the price action.

The above chart shows purple arrows, which indicate each time the AO bars cross the zero line. Each crossing of that zero line indicates the end of a price swing and wave pattern too. The purple boxes on the chart indicate the turning spot of each swing whereas the arrows in between the purple boxes show whether the price swing is a:

  • Bearish impulse: red arrow
  • Bullish impulse: blue arrow
  • Bearish correction: green arrow
  • Bullish correction: orange arrow

Compare the above chart to a naked chart that you can see here below. Would you be able to achieve the same consistency with the AO as without the AO? Would you truly be able to recognise the price swings as quick and with the same consistency?That is possible for traders who have more experience but is much more difficult for traders that are beginning or intermediate. They are much better by using a rules based approach. All the rules connected to this and much, much more is what we fully explain in our ecs.SWAT methodology.

Identifying Momentum & Correction

Now that you know how you can find, measure, and analyse the correct price swing on any chart, we wanted to provide you with more examples on how to identify momentum and correction

.

Here is a summary:

  1. This chart shows how strong AO bars moving away from the zero line.
  2. As a confirmation on the price chart, you can also see how price is moving away from the moving averages.
  3. The strong impulse is likely to see a bearish continuation once price makes a pullback, which occurs a little later.
  4. The AO bars go back to the zero line and complete a bullish correction and retracement.
  5. A strong breakout candle and ecs.SWAT candle start the downtrend again. Strong AO bars again emerge as they move away from the zero line, which signals a bearish continuation as expected.


Here is a summary:

  1. A bigger retracement is taking place on the 1 hour chart because the 4 hour world is making a pullback.
  2. But we can see early signs of a trend continuation when price is close to the zero line and then falls below it.
  3. Both price and the AO bars fall dramatically after that before a larger pullback takes place and a final last push which creates a divergence pattern.

Labelling Wave Patterns

Once you know how to spot the correct price swing, know its direction (bullish or bearish), and know its behavior (impulsive or corrective), then you are well on your way to becoming an Elliott Wave analyst. Wave analysis is nothing more or less than analysing price swings from the past and analysing what the current and next price swing is likely to be. Analysing swings is like putting together a puzzle and you are using the pieces from the past to understand what piece might fit next.

Although wave analysis might sound or seem complicated, its complexity is massively reduced when using a wave trend indicator to understand price swings. But keep in mind that knowing how to do wave analysis is not necessary if you trade our ecs.SWAT method because we trade the waves without labelling them and you can do the same.

Although we will not dive into all the facets of wave analysis in this sub paragraph of today’s article, we did want to provide an overview of how the AO works together with wave analysis.

Wave 1

The AO bars are showing a first stronger push away from the zero line, often into the opposite direction of the previous swing.

Wave 2

A shallow retracement back to the zero line occurs, but the AO bars do not go much into the opposite direction.

Wave 3

Strong AO bars push away from the zero line. Keep in mind that the wave 3 might become extended and hence you might see several strong pushes away from the zero line. Some of these pushes could all be part of a larger wave 3.

Wave 4

Eventually the strong wave 3 will finish and a larger retracement will take place back to the zero line, which could easily occur on a higher time frame as well because waves 4 are often lengthy.

Wave 5

The last push in the trend. The AO bars move away from the 0 line but not as much as the wave 3, which creates divergence because price does often make a higher high but the AO does not.

Wave A

The AO bars were closer to the zero line usually because the trend is becoming slower. The first counter trend move shows impulse as the AO bars cross the zero line and keep their speed, moving into the opposite direction.

Wave B

A last push with the previous trend but the AO bars hardly cross the zero line any more.

Wave C

The larger correction continues as a large push creates a 3rd counter trend wave.

ABCDE triangle

When a triangle or wedge chart pattern takes place, the AO bars will be mostly hanging around the zero line.

Summary

All in all, the AO is a major asset when analysing the charts, price swings, and wave patterns as it helps you:

  • Identify the correct price swing: use the crossing of the AO bars below and above the zero line to know what is the price swing. You then know the start and end of each price swing on the chart as well (see above).
  • Understand the direction of the price swing: when AO bars are above the zero line, this mean that price is either showing bullish momentum or a strong bullish correction which depends on the context of the other price swing. In both cases though, the bulls are in control of the current price swing. Same is true of course when the AO bars are below the zero line, which means that the bears are in control.
  • To understand the behavior (impulse or correction) of the price swing: traders can also understand the behavior of the price swing and estimate whether its impulsive or corrective. If price is showing a strong push (momentum / impulse) above the zero line, then a move back to and even below the zero line is often a retracement. But if the AO bars are crossing the zero line after a divergence pattern (AO bars showing a failure to make a higher high or lower low), then the chance of a reversal is increasing. A trend continuation is often impulsive, a retracement is often corrective whereas a reversal will most likely become impulsive.
  • To determine the wave patterns of each swing: once traders can find the correct price swing, can analyse whether its bullish or bearish, and can understand whether its corrective or impulsive, traders can then use that information to analyse, judge and evaluate the most likely wave patterns.

Analysing wave patterns is nothing more or less than understanding the sequence of price swings. Mastering wave analysis is now within your reach.

But keep in mind that knowing how to do wave analysis is absolutely unnecessary if you trade our ecs.SWAT method. The beauty of SWAT (Simple Wave Analysis & Trading) is that you can:

Trade the waves without knowing the waves.

We built our SWAT methodology in such a way that you can benefit from the waves without needing to use the wave patterns themselves.

Join our World of Trading by starting with ecs.CAMMACD, ecs.SWAT or ecs.LIVE!

Good trading,
Mislav Nikolic & Chris Svorcik
Elite CurrenSea

P.S. Share our passion for trading and learn from our methods and techniques by:

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Bernard van Eck

Thank you very much for this instructional article. It is truly helpful and you guys are truly an inspiration.