Learn Elliott Wave Trading

Applying Elliott Wave Theory

Elliott Wave Trading - The Holy Grail?

Is Elliott Wave Trading the holy grail? Stock Market traders are always on the look out for that elusive trading system that is going to make them their first million, a system  that is going to help them pick the winners .......does Elliott Wave stock analysis really fill that bill?

Applying Elliott Wave trading methods to their charts can offer a trader some significant advantages over the next trader that limits his or her analysis to standard technical analysis methods.  

Some technical analysis systems may show where support or resistance lies, but by applying your new found knowledge of Elliott Wave Theory, you will also be able to assess the odds and probabilities of whether that particular price level is likely to break or hold, before it gets there.

As those other traders are buying a support level, you may be adding to your shorts in the knowledge that your current Elliott wave analysis suggests that there is much more down side to come.

Learning Elliott Wave Theory can stop you being part of the crowd, the herd of traders that sell the low and buys the tops.

Applying Elliott Wave analysis will help you become that trader who just entered a long position, confident in the knowledge that your Elliott Wave count shows a long term ending pattern completing, and helps you avoid getting caught up in the fear and greed cycle that drains you and your trading account.  

Elliott Wave trading makes no differential between a bull market or a bear market. The principle of the wave theory remains the same whether stock markets are advancing or declining, thus helping you to reach a balanced view in your analysis, as to where the true direction of the markets prices lie, at any given time.

elliott wave trading technical analysis

Elliott Wave Trading

Elliott Wave Trading

Which Wave Do I Buy?

The question that everyone new to Elliott Wave Trading asks, "Which wave do I buy?" 

The Elliott Wave traders dream is to catch a wave 2 low and run the trend to the end. Wave 3 is most commonly the largest and strongest move, this makes the wave 2 low the ideal entry point.

When Elliott Wave trading, it is just as important to know what the market can not do, as it is to know what it can do.

In our Learn Elliott Wave Basics sections We describe how wave 2s are often sharp and deep and also that they can never retrace more than a 100% of wave 1, this enables the Elliott Wave trader to limit the risk taken when entering a trade at this point.

Traders then know that this is not a wave 2 If prices break the origin of wave 1 and that their analysis is wrong.

Elliott Wave Trading Rules

The Elliott Wave trading rules are characteristics of wave formation that are essential to the principle of Elliott Wave Theory. Contrary to popular belief, there are not many Rules in Elliott Wave trading but Elliott Wave Rules must be observed. 

  • Wave 2 Never breaks the origin of wave 1
  • Wave 4 Never breaks the origin of wave 3
  • Triangles Always appear in the position prior to the final move, or as the final wave within a combination.
  •  Impulse waves Always subdivide into 5 waves.
  • Wave 3 is Never the shortest of the 3 impulse waves.

Elliott Wave Trading Guidelines

Guidelines are characteristics of wave formation that are commonly found in the principle of Elliott Wave Theory. Guidelines are not essential characteristics of Elliott Wave trading but, they are features which occur regularly enough that a trader should expect that they are likely to apply.

  • Wave Alternation - Waves 2 and 4 commonly alternate in design. One may be a zigzag and the other a Flat. Wave 4 can be a triangle.
  • Wave Alternation - Waves A and B commonly alternate in a corrective wave, where wave A is a 3 wave move.
  • Wave 3 is usually the longest and the most likely to extend.
  • 2 waves within an impulse tend towards being equal in length.
  • Impulse waves usually trend within a parallel price channel
  • If wave 4 overshoots or undershoots the channel trend line, wave 5 will often overshoot or undershoot the price channel too.    

Elliott Wave Trading - Applying Elliott Wave Theory

It is essential for an Elliott Wave trader to remember that although the Elliott Wave Theory can tell him what the markets prices Can Do,and even what prices Can Not do, there is absolutely no way that any analysis system can tell him what prices Will do! 

Elliott Wave trading is not the holy grail that some are looking for, they will be searching for a very long time for that one!

No, Elliott Wave trading is actually all about the search for those high value trading opportunities that offer a limed risk to the traders capital. Limiting risk by knowing where the analysis is wrong thus enabling the trader to apply a sensible money management based trading strategy founded on logical analysis.   

Many traders get wrapped up in their current wave count and refuse to accept when it goes wrong, instead, preferring to come out with some very strange wave counts to justify their positions.

These are analysts that are fooling themselves, but you can not fool the market!

The markets love a trader with an ego and a point to prove!

This is fine for an analyst of course, who's motivation is being seen to be right, but for successful Elliott Wave trading when real cash is involved, it is essential that a trader should be quick to accept when it is wrong and move on!

Holding on to a trade on the back of dubious analysis is the quickest way to becoming one of the statistics that there is.

Learn more about Kennys Elliott Wave Analysis trading strategies.

Learn More About Elliott Wave Trading

Elliott Wave International, have an extremely useful Elliott Wave Tutorial for free online. It's broken up into 10 lessons across 50 pages, so it’s easy to read and review at your leisure. Learn more about Elliott Wave Trading and how to access the free Tutorial.
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