Elliott Wave Analysis of Cryptocurrencies: Riding the Digital Wave
While the basic Elliott wave structure of five waves forward and three waves back is the same for all markets, it will not look the same in all markets.
Different markets have different quirks and tendencies. A feature of high volatility markets like commodities and even more so of cryptocurrencies is exponential growth.
A market which exhibits exponential growth will show a price chart with a parabolic curve. Within the curve, at the early stage of the Elliott wave structure second wave corrections will be relatively deep and time consuming, then thereafter third waves will be powerful, fourth waves will often be relatively brief and shallow, and fifth waves can be the most powerful movement of all.
This tendency to exhibit a parabolic curve is especially so for third waves.
Third waves may only subdivide as impulses, and for high volatility markets it is the fifth wave of a third wave impulse which is often the strongest portion of upwards movement.
Not only is a fifth wave of a third wave impulse the strongest, it can move price the greatest distance in a fraction of the time the previous waves took. This is the vertical upwards spike seen at the end of major bull runs for Bitcoin and other cryptocurrencies.
It is important to understand this tendency of cryptocurrencies for two reasons. Patience in waiting for the fifth wave of a third wave to show itself is required to gain the greatest profit. When a vertical upwards spike is seen it is usually at or very close to the end of a major bull run. It is important to take profit close to the end of this bull run and not try to hold on for even greater profits, as a bear market will surely follow and typically wipe out 70 to 90+ percent of market value.
Another important aspect of cryptocurrencies to understand is their bear markets are brutal. Bitcoin has had repeated bear markets which have wiped out over 70 percent and up to 94 percent of market value. It would be devastating to hold on at the end of a third wave, hoping for the vertical upwards movement to continue, only to see almost all profits gone a few months later. Or even worse, to know nothing about how cryptocurrencies fit into an Elliott wave structure and buy when prices are extremely bullish and making news headlines, only to see prices plummet in a devastating bear market and lose your entire investment.
A thorough understanding of Elliott wave, coupled with use of other technical analysis tools can be used to identify a trend early on, and identify when the trend is likely to change.