Exploiting Profitable Trending Patterns

[koakey]

Hi, and welcome to my thread.

Here I will be sharing how I use Elliott Wave to help provide me a road map for m trades in the markets and specific trades I look for and strategies I deploy.

The first thing I think needs to be understood in trading is it can never be easy but you should endeavour to make it as simple as possible.

Elliott wave can be a complicated theory but it can be also be simplified.

There is a lot of discretion in the various guidelines of Elliot but there are only three simple hard and fast rules.

1 - Wave two must not retrace 100% of wave one.

2 - Wave three must not be the shortest and is usually the longest.

3 - Wave 4 must not overlap with wave one.

All these three rules do is ensure we are remaining in a valid trending pattern of higher highs and higher lows.

This is why they are not only important, but critical, since Elliot is a trend following methodology.



Outside of this, there are three main things to be remembered when using Elliott.

1 - In itself, Elliot wave is not a trading strategy. It is only an aid.

2 - Elliot wave is a fractal pattern, so if we have waves on larger cohorts , we should find smaller version of them inside smaller charts.

3 - Elliott wave will not be present in all charts, you will not be able to make the theory fit to everything.


There is an abundance of free training on the theory of Elliott wave easily available to you by searching the internet, so this will not be an Elliott wave theory tutorial.

Instead it will be focusing specifically on how to exploiting the pattern for profit.


In following posts, we will cover;

1 - Optimum entry opportunities in a Elliot cycle.

2 - Knowing where to place hard stops in an Elliot cycle.

3 - Knowing where to trail stops and/or take profit in an Elliot cycle.

4 - Creative methods of money management/trade management in an Elliot cycle.

5 - Different styles of trading a cycle (eg, swing trading vrs shorter term scalping)

6 - Live analysis and results tracking of methodologies being deployed.


I will update this thread as often as time permits, so subscribe and check back for updates.

 

[koakey]

Optimum Entry Spots

Let us start with entering the market at optimum points.

Retrospectively, optimum entry points are easy to spot.

They are the bits of the chart where you think “If only I’d got in there”.

Or, even worse, “Why did I get in trading in the wrong direction at the worst possible time”.
The theory behind getting in at the optimum points is a relatively simple one, you want to enter at the end of a correction, but this is far easier said than done in most cases.

For you to be able to enter into the end of a correction, you need three things.

1 - To know we are in correction.

2 - To know where you expect the correction to end.

3 - Not to be spooked out in the shakeout price action typically observed at the end of a correction.

We will get into the specifics of forecasting where to enter before time later in the thread but for now we will just look at hypothetical the prime times to be entering into a trade when we have an Elliott wave cycle present.

There are five prime entry points in a five wave Elliott move.

Three of them are in the line of the trend, two of them are in the line of corrections.

Everyone has heard the mantra “The trend is our friend” and it goes without saying that entering in line with the trend yields the most opportunity but entering at the ideal points of a correction can also give you very nice trades since there are times where the large ABC correction at the end of a trend cycle is made up of very strong and sharp moves.

On smaller time frames, these are essentially the same as little trends and we can often see them accelerating off without coming back to make lower lows, which makes them good for running profitable trades with trailing stops.


Ideal entries in line with the trend are;

1 - End of leg two.

2 - End of leg four.

3 - End of corrective leg C.




Ideal entries against the trend are;

1 - End of leg five.

2 - End of B corrective leg.



In the next post, we will start to examine these potential entry points on real charts, taking this away from hypothetical and into real trading examples.

 

[koakey]

Entering For The Strongest Wave

Wave three of the Elliot cycle is the strongest wave and the best one to be in the market for when trading a trend.

Wave three is where the market really makes ground, where it makes new breakouts and carves out a new trading range.

Wave three is the wave that most definitely progresses the movement of a trend.

To enter into the start of wave three, you need to be entering into the end of corrective wave two.

To be able to do this, you need to know we are indeed in a corrective wave two and to make this determination, you need to know we have seen the wave one of a new Elliott wave cycle.

So we will start there, with the characteristics of a wave one.


We will be using a downtrending chart in our example, so in this scenario, we are looking to a strong spike up after positive news.

We are then looking for this spike to be rapidly rejected and this will typically form classical candle spike reversal patterns such as a pin bar or engulfing candle set up.

There are multiple things that happen in the run up to the start of a wave one that will often shake out traders or get them on the wrong side of the market.

1 - Price will break above an area that looks ideal to place stop losses.

2 - The final part of the move will be sharp, strong and often move with a lot of velocity.

3 - There will be examples of failed/fake reversals followed by strong breakout spikes.

4 - At mentioned above, often we will see news that implies the market will continue to move in that direction

We do not need to see this setting up for us to be able to look to enter into the start of wave three, we only need to be able to see it once it has happened.

These waves should stick out, we should have been seeing fairly solid trending action with lower lows and lower highs and the spike outside of this continuation of lower lows and lower highs should be obvious, it should stick out.

We should then see the first wave forming in five little sub waves.

We should see the new trending legs ending at these fib extension levels when we draw the fibs from the spike top swing.


Wave 1 ends around 1,27%

Wave 3 ends around 1,61%

Wave 5 ends about 2,20%

Once we have seen this, it is game time.

We have now completed all of wave 1 and we are looking to see the wave 2 correction.

Wave two should typically meet the following criteria;

1 - It will retrace between 50 - 80% of wave one.

2 - When using extension levels from the start to the end of wave 5, we should meet the 1,61 - 2,61% levels.

There should be a confluence of the retracement and the extension levels marking out a ver defined entry area.

In the chart below, the retracement levels are yellow, the extension levels are red.

We can then set limit orders to enter into the retracement.

Our entry zone is between the 50 - 80% retracement levels (and matching extension levels).

Our stop loss goes just above the high of wave 1.

 

[koakey]

Optimum Entry Spots

Let us start with entering the market at optimum points.

Retrospectively, optimum entry points are easy to spot.

They are the bits of the chart where you think “If only I’d got in there”.

Or, even worse, “Why did I get in trading in the wrong direction at the worst possible time”.
The theory behind getting in at the optimum points is a relatively simple one, you want to enter at the end of a correction, but this is far easier said than done in most cases.

For you to be able to enter into the end of a correction, you need three things.

1 - To know we are in correction.

2 - To know where you expect the correction to end.

3 - Not to be spooked out in the shakeout price action typically observed at the end of a correction.

We will get into the specifics of forecasting where to enter before time later in the thread but for now we will just look at hypothetical the prime times to be entering into a trade when we have an Elliott wave cycle present.

There are five prime entry points in a five wave Elliott move.

Three of them are in the line of the trend, two of them are in the line of corrections.

Everyone has heard the mantra “The trend is our friend” and it goes without saying that entering in line with the trend yields the most opportunity but entering at the ideal points of a correction can also give you very nice trades since there are times where the large ABC correction at the end of a trend cycle is made up of very strong and sharp moves.

On smaller time frames, these are essentially the same as little trends and we can often see them accelerating off without coming back to make lower lows, which makes them good for running profitable trades with trailing stops.


Ideal entries in line with the trend are;

1 - End of leg two.

2 - End of leg four.

3 - End of corrective leg C.




Ideal entries against the trend are;

1 - End of leg five.

2 - End of B corrective leg.



In the next post, we will start to examine these potential entry points on real charts, taking this away from hypothetical and into real trading examples.

 

[koakey]

Entering For The Strongest Wave

Wave three of the Elliot cycle is the strongest wave and the best one to be in the market for when trading a trend.

Wave three is where the market really makes ground, where it makes new breakouts and carves out a new trading range.

Wave three is the wave that most definitely progresses the movement of a trend.

To enter into the start of wave three, you need to be entering into the end of corrective wave two.

To be able to do this, you need to know we are indeed in a corrective wave two and to make this determination, you need to know we have seen the wave one of a new Elliott wave cycle.

So we will start there, with the characteristics of a wave one.


We will be using a downtrending chart in our example, so in this scenario, we are looking to a strong spike up after positive news.

We are then looking for this spike to be rapidly rejected and this will typically form classical candle spike reversal patterns such as a pin bar or engulfing candle set up.

There are multiple things that happen in the run up to the start of a wave one that will often shake out traders or get them on the wrong side of the market.

1 - Price will break above an area that looks ideal to place stop losses.

2 - The final part of the move will be sharp, strong and often move with a lot of velocity.

3 - There will be examples of failed/fake reversals followed by strong breakout spikes.

4 - At mentioned above, often we will see news that implies the market will continue to move in that direction

We do not need to see this setting up for us to be able to look to enter into the start of wave three, we only need to be able to see it once it has happened.

These waves should stick out, we should have been seeing fairly solid trending action with lower lows and lower highs and the spike outside of this continuation of lower lows and lower highs should be obvious, it should stick out.

We should then see the first wave forming in five little sub waves.

We should see the new trending legs ending at these fib extension levels when we draw the fibs from the spike top swing.


Wave 1 ends around 1,27%

Wave 3 ends around 1,61%

Wave 5 ends about 2,20%

Once we have seen this, it is game time.

We have now completed all of wave 1 and we are looking to see the wave 2 correction.

Wave two should typically meet the following criteria;

1 - It will retrace between 50 - 80% of wave one.

2 - When using extension levels from the start to the end of wave 5, we should meet the 1,61 - 2,61% levels.

There should be a confluence of the retracement and the extension levels marking out a ver defined entry area.

In the chart below, the retracement levels are yellow, the extension levels are red.

We can then set limit orders to enter into the retracement.

Our entry zone is between the 50 - 80% retracement levels (and matching extension levels).

Our stop loss goes just above the high of wave 1.

 

[koakey]

Trading The Double False Breakout Wave.

Our next optimal entry point is at the end of wave wave 4 and the start of wave 5.
Again, we are looking to be able to enter at the end of the correction and again for us to do this we need to know we are in a correction and what part of the cycle we are in.

This should be easy to spot since the strong wave 3 is prominent and noticeable.

Wave 4 is characterized by often containing whipsaw sort of price action full of false breakouts.

It is also usually a shallow correction since although small traders who happen to have ridden part of wave 3 are taking profits as price stalls and shows potential reversal signs, larger traders are staying in and this prevents price pushing back too much.

The retracement for this leg i typically 38,8% of wave 1 and 3 combined.

This level should be hit with an aggressive spike in price action, a false breakout alluding to a potential reversal being on the cards.

We then usually form a triangle type of charting pattern as price contracts followed by a spike under the previous lows.

We often will see the market making these news lows by forming an AB=CD pattern and the wave should end between the 1,27 - 1,61% extention levels of the 38.8% retracement.

Wave 4 should not retrace more than 50% of the waves 1 and 3 combined, so a stop loss behind the 61.8% level is a good place to set stops.

Pending limit orders can be placed to enter at the 38.8% retracement level.

These double false breakouts are notorious for taking money off retail traders.

Understanding how it forms not only gives you ideal set ups to profit from but also helps you avoid the traps that cause so many traders so much pain.

 

[koakey]

Catching The Reversal

Running with the trend is all well and good but trend reversals can be vicious. It is important to study how a trending move ends, or begins a major correction so you know when to be booking running profits and not to get caught out on the final false breakout.

Of course, the end of a trend and start of a correction is also a prime time to be entering trades in the direction of the correction.

If you get it right, the risk:reward opportunities on it are great, since we are looking to see the market bouncing back at least 50% of legs 1, 3 and 5 combined.

To recap what we have learned about wave 5 so far;

1 - Wave 5 will usually be a very fast breakout.

2 - Wave 5 will usually come after a 38.8% retracement in wave 4.

3 - Wave 5 will usually end between 1.27 - 1.61% extension of wave 4.

4 - Wave 5 often completes in an AB=CD formation of the final breakout.

Another common observation that can be made is wave 5 and wave 1 are similar or equal in length.

Our first thing to look for, is to have seen a sharp bounce into approximately the 38,8% retracement level after seeing a strong trending move.

If we see this, we can draw our fib levels from the start to end of wave 4 and we know we are looking for price to trade into 1,27 - 1,61% extension of this area.

I have highlighted the time we can mark in these fibs on the chart above.

We now know hypothetically where we are looking for the reversal.

We can then look for additional criteria to back up the idea this can be the reversal level.

Our main indication to be looking for, is that AB=CD ending to move.

We can watch for this when we see what looks like it could be a forming double bottom pattern.

We can measure the length of the first leg and see if a false breakout would take us into our pre forecast reversal level.


I have highlighted the point at which we’d be able to start to make this forecast.

When the red line is included, we can see this move forms a harmonic “Butterfly” pattern.

Once we have this confluence of patterns, we can set limit orders to buy in the 1,27 - 1,61% area.

Stop losses on these trades can go behind the 2,20 extension level and behind the 2,61 level at the furthest. If the market trades past this level, it has over extended and this trade analysis is no longer valid.

 

[itspossible]

https://www.youtube.com/watch?v=TMCthi3pFEQ

koakey

 

[koakey]

https://www.youtube.com/watch?v=TMCthi3pFEQ

koakey

Yes. My Mother loved that song.

 

[koakey]

Here We Go Again

Catching leg one.

A true trend trading party trick is to nail the end of the large correction and the start of another five leg advance.

If there is a “Holy Grail” in trading, being able to identify this part in a persisting Elliott wave cycle may be it.

It gives you the largest possible risk:reward and the most scope to run our winners and add to profitable positions.

The trade that ticks all the boxes sounds elusive but it does usually have a very identifiable pattern to it.

The formation shape should look like this;

And this is the formation of a harmonic Shark pattern.

When we use a combination of retracement and extensions, we should see the shark pattern completing between 50-80% of the last five legs and 1.61 - 2.20 extension of the final false breakout leg.

Highlighted are the areas to enter limit orders to join the trend again and the stop loss, which goes above the previous wave 1.

 

[koakey]

News and Charts

So, there you have the prime entry spots in an Elliott wave cycle.

At this point, let’s take a moment to stop and talk about whether or not we can use this charting analysis when there is strong fundamental data.

For those of you who have not noticed, the section of chart we have been using on GBPJPY is from a time when we have had some extreme moves due to news.

Wave 3 of this move was the huge move on Brexit.

We seen the end of wave 5 in the “Flash crash” event on the Pound.

We seen the start of leg one (assuming we are now in another 5 wave decline) when the BoE announced the would not be lowering interest rates.

These major moves and “surprising events” all chart very well inside the repeatable principles of the Elliott theory.

 

[koakey]

Execution of Trades

Now we have come to the time where we start to decide how we will engage the market.

What methodology to use varies depending on your trading mentality and your goals.

Some options are;

1 - Simple swing trading.

2 - Swing trading with scale in.

3 - Short term trading inside of swings.

4 - Creative money management trading within swings.

We will cover them one by one.

It has been mentioned before but should be repeated that if there is an Elliot cycle in place, we will see the trend legs forming on all time frames, so whether you want to trade over multiple months of be in the market for mere minutes, you can adapt these to fit any time frame.

 

[gerryg]

So, there you have the prime entry spots in an Elliott wave cycle.

At this point, let’s take a moment to stop and talk about whether or not we can use this charting analysis when there is strong fundamental data.

For those of you who have not noticed, the section of chart we have been using on GBPJPY is from a time when we have had some extreme moves due to news.

Wave 3 of this move was the huge move on Brexit.

We seen the end of wave 5 in the “Flash crash” event on the Pound.

We seen the start of leg one (assuming we are now in another 5 wave decline) when the BoE announced the would not be lowering interest rates.

These major moves and “surprising events” all chart very well inside the repeatable principles of the Elliott theory.

Breaking down those move after they happened doesn't guarantee anything in the future. Can be simply a subjective view which looks sensible for you but BS for others.

And after all, maybe it was just a coincidence?