This is not meant to be an article about the whole concept of Elliott wave theory you can look that up on the internet. Here we are simply going to highlight a simple strategy to identify Elliot wave sequence in any instrument (stock, commodity, forex etc.) and trade it successfully. So how do you identify this setup?
This basic idea is to look for stocks that are in the first 2 waves of the Elliot wave sequence (there are 5 waves in the impulse sequence and 3 for the corrective sequence). Usually the longest and strongest wave is the third wave, why? the stock has been noticed and the buying spree (selling) is in full swing sending prices higher (or lower).
So let to break it down. The pattern below is the simple three wave move, where a stock moves up 1, retraces 2, and then breaks the previous high to make a new high. The pattern is the same when the stock is down trending. The pattern is also applicable to difference timeframes but my advice is to stick with longer timeframes. So now we know what it should look like, how do we make money from it? Let make it step by step (the 2 steps)
- Look for an initial wave higher (or lower in a down trend) with a subsequent retracement to a normal Fibonacci level (38.2%, 50% or 61.8% - I generally prefer the deeper retracement you need to find what works for you) – focus on what stock is doing right now.
- Look for a confirmation of the beginning of the third wave by checking for
- Trendline breakout off the retracement move 2 i.e. trendline following wave 2;
- Reversal candlestick types e.g. bullish engulfing, a doji, gap-up etc.
The signal is in place for a low risk trade, therefore we enter a position in the stock. You can decide to follow the whole move up or you can close half of your position close to the previous high of wave 1. Set you stoploss and let the trade unfold. This is a simple and profitable strategy, follow it with patience, and remember this is not the Holy Grail (I have not come across one, probably because I am not looking for one) but a plan that put the odds in your favour and makes you money – which is (one) the reason why we trade (my reason, I guess it is the same for you)
Wait! Before you take that Million dollar trading strategy you found for sale online! Do you know that simple and tested trading strategies can make you money most of the time.
