Day Trading & Forex Forum

Similarly, the entry price can always be at the extreme of your signal bar, whether a textbook reversal bar, a Japanese doji candlestick or whatever. This is far more difficult to do at other points in any EW sequence, assuming you somehow know where you are in the pattern!

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Then it’s a simple matter of dividing that money risk into your maximum money risk per whole trade…say, 2% of a $20,000 account or $400. Your position is now sized.

Risk/reward and profitability…

On the other side of the risk equation for a trader must be the measurement of reward. This has to be clear, easily calculated before every single trade and be constant during a trade. Specializing in trading off potential ABC corrections gives you an advantage here…the EW price levels that would be reached if the trade works as anticipated are the natural reward levels to take. For instance, if you trade off an ABC correction at a potential wave 2 low, the minimum, typical and maximum wave 3 price levels are there to be used in your reward assessment. Again, these levels are all based on Fibonacci numbers, so your reward levels can be clearly defined for each trade. You can know your risk/reward potential before committing any capital at all.

Now it is simply a numbers game and one that novices often lose by excessive emphasis on the win/loss statistic. Winning 70% of your trades is no use if you only win $400 on each winner but lose $1000 on each loser. In practice, most profitable professionals have a win/loss ratio below 50% (sometimes well below…) but control of risk and concentration on risk versus reward enables them to limit the losses against the wins. Result – profits.

Elliott wave has to be stripped, though…

As Elliott theory all too often seems the preserve of academics, a stark approach is needed. The standard pitfalls of EW have to be avoided, otherwise you have little chance of success. An ‘isolation approach’ sidesteps the need to fit a current pattern into a previous pattern or into a larger timeframe (or several – there are 9 different Elliott frames cited by Frost & Prechter in their seminal ‘Elliott Wave Principle’). There’s no need to desperately squeeze a smaller pattern out of your current pattern on-screen or to struggle with dreaded ‘alternate counts’.

This also means no interference mid-trade, avoiding the dangers of EW counts changing when you’re in an open position – such uncertainty is completely unwelcome!

All in all, controlling risk rather than obsessing about accuracy, you have a chance of at least buying a sun lounger like the one in the ad!