Elliott Waves Trading Strategies

Elliott wave analysis is useful in providing the most likely next direction, but often traders may be unsure exactly when to enter and exit based upon analysis. If the market is predicted to move lower then obviously you would wait for prices to stop falling before buying, or for more aggressive traders they may sell short. If your wave count expects price to move upwards then obviously you would buy. Trying to trade against the main trend is extremely risky. The wave count should tell you what the main trend is. Invalidation points are the most obvious place to put stops, and targets are the most obvious point at which to take profit. But this does not tell you where to enter a trade or how to add to your position. In an effort to bridge this gap I offer the following. Please feel free to add your own comments and suggestions.

Basic Elliott Wave Structure

Using Elliott wave analysis we want to trade the actionary waves within the basic structure. Actionary waves are waves which carry price in the direction of the main trend. Within an impulse (or a diagonal) actionary waves are 1, 3 and 5. Within a correction actionary waves are waves A and C.

Using a trend channel about 2 to enter 3

For each actionary wave the method is similar. Draw a trend channel around the prior reactionary wave. When the channel is breached then the next actionary wave should be underway, at that point enter a trade in the direction of the main trend. For the example above we enter a long position to trade the third wave upwards when price moves above the small orange channel containing the second wave zigzag.

When do you exit this trade?

You would calculate a target at which point you could close the trade and take profit. However, targets are not always met. If price falls short of the target how do you know when to get out?

Using a trend channel about 3 to exit

Using Elliotts technique we draw a trend channel about the impulse which here is a third wave. Draw the channel from the highs of 1 to 3, and place a copy on the low of 2. If this does not contain wave 4 then redraw the channel as follows: draw a trend line from the lows of 2 to 4 and place a copy on the high of 1. If neither of these methods work then construct a best fit channel which contains as most of the movement as possible. When the channel is breached in the direction opposite to the main trend in which you are trading then you should exit the trade. In exactly the same manner you would enter a trade for a fifth wave when you have confirmed that the fourth wave is complete:

Using a trend channel about 4 to enter 5

And you would either take profit at your calculated target if price reaches the target, or you would exit the trade when it is clear that the trend has changed.

Using a trend channel about 5 to exit

What wave degree you choose to trade will depend entirely upon what style of trading suits you best. If you dont like to hold positions overnight or over a weekend then you would trade on hourly charts at wave degrees below minor. If you like to hold trades for weeks or months and dont like to enter and exit so often you would trade on daily charts wave degrees at minor or intermediate.

Using a trend channel about 5 to exit

Using this strategy you would trade this first wave at intermediate degree which may last several weeks to a few months. If your calculated target was reached you may exit about the high. If price fell short of your calculated target you would exit the trade when the channel is breached in the direction opposite to your trade.

How would you add to a longer term position?

Corrections may be used as opportunities to join the trend.

Using a trend channel about 5 to exit

In the above diagram you may add to your position in the early stage of the third wave, and again in the early stage of the fifth wave. You can take this idea and move it down one degree; you may also add to your position when each of the lower degree corrections are confirmed complete with their own channel breaches. There would then be several opportunities to add to a position. Within stock markets the easiest wave degrees to trade would be at least minor, or intermediate. With wave degrees much below this the movements are mostly smaller and brief. However, this concept can work at all wave degrees and for all types of traders. Scalping would work on lower wave degrees, on hourly charts and down to 5 minute. Longer term trading would work best on daily charts at minor degree and intermediate degree, or even above. It depends upon your particular style and risk appetite.

In the diagrams above the structures shown are the simplest possible; impulses and zigzags. However, in reality there is a lot more variation than this, particularly for corrections. Zigzags lend themselves very well indeed to parallel channels, but flat corrections do not. Combinations and double and triple threes also do not lend themselves to trend channels at all. For these structures you draw a channel about the final C wave of the final structure and use this channel to indicate an end to the correction. Some real life examples from the S&P 500 Index are provided below.

Elliott Waves Indicator: http://elliottindicator.com Elliott Wave Indicator is calculating about two thousand possible waves (patterns) and wave combinations, taking into account every old and modern Elliott Wave rule, every Fibonacci ratio and the fractal nature of the chart.