EWO (Elliott Wave Oscillator) (2024)

EWO (Elliott Wave Oscillator)

EWO (Elliott Wave Oscillator) is one of three Waves indicators included in the list of standard indicators of Marketscope (the othertwo are EW (Elliott Wave Indicator) and EWN (Elliott Wave Number)). The indicators help applying Elliott Wave Theory to forex trading.

The theory itself was developed by Ralph Nelson Elliott (1871-1948) in 1920s - 1930s and presented in his book The Wave Principle in 1938.In 1939, it was summarized in a series of articles in the Financial World magazine, and finally covered most comprehensively in his major workNature's Laws: The Secret of the Universe in 1946.

Elliott Wave Theory asserts that crowd trading behavior ebbs and flows as waves in a sea and makes the market prices move in the same way. Basedon this ebb and flow nature of price movements, Elliott identified a certain fundamental wave structure (or pattern) consisting of a 5-wave motivesequence (numbered 1, 2, 3, 4, and 5) followed by a 3-wave corrective sequence (lettered a, b, and c). In fact, Elliott Wave Theory is much morecomplicated than this 5-3 combination, but we will focus only on the very basics. Motive waves move in the direction of the market trend. In anuptrend, rising waves are called impulse waves, and declining ones are called corrective waves. Conversely, in a downtrend, declining waves arecalled impulse waves, and rising ones are called corrective waves. The underlying 5-3 pattern remains constant regardless of its time frame. Anyimpulse wave comprises five waves of a smaller time frame, and any corrective wave consists of three waves of a smaller time frame.

On the following pictures you can see examples of Elliott Waves on an uptrend price chart.

and on a downtrend price chart.

According to Elliott, the 5-wave motive sequence of an Elliott wave pattern must comply with the following three rules:

Rule 1 - wave 2 cannot retrace more than 100 % of wave 1.
Rule 2 - wave 3 can never be the shortest of the three impulse (numbered 1, 3, and 5) waves.
Rule 3 - wave 4 can never overlap wave 1.

Besides the three rules that must hold true at all the time, Elliott worked out numerous guidelines, but in this article, we will mention onlythree key ones:

Guideline 1 - when wave 3 is the longest impulse wave of the motive sequence, wave 5 is approximately equal to wave 1.
Guideline 2 - the forms of wave 2 and wave 4 alternate. If wave 2 is a sharp correction, wave 4 is a flat correction. Conversely,if wave 2 is flat, wave 4 is sharp.
Guideline 3 - after a 5-wave motive sequence (numbered 1, 2, 3, 4, and 5), its 3-wave corrective sequence (lettered a, b, and c)usually ends in the area of the prior wave 4 low.

Elliott Wave Theory is very dependent on an accurate wave count. If any of the three rules does not hold true at any moment, a trader needs to begina new count. Moreover, even with accurate counts, a trader needs to re-evaluate and adjust counts as a new price emerges. Besides, determining whereone wave ends and a new one starts is extremely subjective. To offset the reliance on subjective wave counting, EWO (Elliott Wave Oscillator) andother Waves indicators of Marketscope (EW (Elliott Wave Indicator) and EWN (Elliott Wave Number)) have been developed.

Elliott Wave Oscillator is intended to help determining where an Elliott wave ends and a new one starts or, in other words, determining when themarket price movement changes its direction (a reversal point) to form an Elliott wave. It is achieved by presenting of EWO values as a histogram'sbars. The values are calculated automatically as the difference between the slow and fast moving averages of a period (the mathematical formulasare provided later in the article). On a chart, the bars are above the zero line when their values are positive and below the zero line when thevalues are negative. By default, a positive bar is light green if its value is greater (and the bar is longer) than the value of the immediatelypreceding one and dark green if its value is smaller (and the bar is shorter) than the value of the immediately preceding bar; a negative bar islight red if its value is smaller (and the bar is longer) than the value of the immediately preceding one and dark red if its value is greater(and the bar is shorter) than the value of the immediately preceding bar. The bars form waves above and below the zero line, and the tops and bottomsof the waves (when the bas change their color from light to dark green or red) usually coincide with price turning points.

Note that EWO is always drawn in an additional area below the market price chart.