Wednesday, April 25, 2012

Elliott Waves - beginner steps

Elliott Waves - the Trading Plan

Step 1

A downtrend ends with Wave 5.
Besides the end of the wave 5 in a downtrend, we also want to see the first indication of a trend reversal - an establishment of a new Higher High. 

Step 2

Once a new Higher high is found, its the first opportunity to plan an early entry with a new trend. Use Fibonacci retracement tool to find price retracement levels (38.2%, 50% and 61.8%).
These levels will give an Entry zone area.

Step 3

Once a Buy order is open, place an initial Stop order below the beginning of the Wave 1.
If price goes past Fibonacci levels resulting in a wrong trade, accept the Loss and at that point place a Sell order with a profit target set cover up the previous loss. 

If price reverses at Fib levels as expected, set Profit target #1 at the first resistance level, which is the top of Wave 1 Close 1/2 of the position at that point. Why to take profits this early? Because if the market decides that it's not the time yet for an uptrend (double top and reverse), we'll have some reward left. 

When the TP #1 is reached, move the Stop order to break even.

Step 4

The key point area consists of 2 considerable points:
1. When the length of the new wave matches the length of Wave 1
(Length 1 = Length 2) - we have reached a new resistance level

2. When the market finds the upper line of a channel (built based on the initial trend line) - we have reached a new resistance level.

Those resistance levels if passed successfully, present an immediate opportunity to add 1 more Buy order to an existing trade. As we know Wave #3 is the strongest wave, so that's a good opportunity to make more profits.

Step 5

Using Fibonacci Expansion tool (Fibonaci click-by-click guide) find the Profit target at 161.8% area.

At this point we want to close all remaining trades. Why? Wave 3 was the strongest most profitable Wave. Wave 4 will be slower and will take longer time to complete, while Wave 5 may not be that high after all, so the time spent for waiting & hoping is not fully justified).

Step 6

If you want to try counter-trend trading with Wave 4, your profit target for a new Sell position will be around 38.2% - 50% Fib retracement level, as well as around the lower band of a new channel (see example below).

Step 7

Wave 5 is the last point to take profits and close any remaining positions.
Same rules (which you've hopefully already learned) apply for finding the best zones for profit taking:

- draw a channel (Tip: if Wave 3 is too steep, instead of drawing a parallel line thorough Wave 3, draw it through W1. The line in this case will cut through candlesticks of Wave 3, but it'll provide a valuable target for Wave 5).

- close 1/2 position at the top of Wave 3 (resistance and possible double top - not uncommon for Wave 5).

- use 61.8% Fibonacci Expansion as the final TP

Step 8

Immediately upon closing all Buy orders & upon favorable indications of an immediate reversal (shift down to smaller time frames to find signs of reversal) consider Selling.
Place the Stop order not too far from the entry. 

Another selling opportunity should be found at Wave b - around 32.8%-50% Fib retracement level.
Measure the length of Wave a to project the target for Wave c. Wave a = Wave c. Take profits and close all trading positions.

Hope you've enjoyed it!


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