By Vadim Pokhlebkin
You may already know that it's easy to follow professional Elliott wave counts in market charts – such as the ones you see in Elliott Wave International's publications, for example. But if you've ever tried to count waves on your own – especially under pressure, while trading – that can be a real challenge.
Yet those who know Elliott say that it's well worth it. What's so special about it? Well, it just happens to be a question we hear a lot. For answers, let's turn to someone with experience in wave analysis and trading: Jeffrey Kennedy, one of Elliott Wave International's senior analysts and instructors. Here is his take.
Elliott Wave Analysis, Benefit #1: It identifies the trend.
You always want to trade in the direction of the trend, with the wind at your back. For example, if you are long a stock, your probability of success is much greater if all major indexes are also rallying. Well, Elliott wave analysis is based on two types of wave development: impulsive and corrective. Impulse waves are five-wave moves, and they identify the direction of the larger trend. A five-wave impulse tells you the trend as up, while a five-wave decline tells you it's down, as this idealized diagram shows.
Benefit #2: Elliott wave analysis identifies countertrend moves within the trend.
Corrective waves are simply a response to the preceding impulse wave; corrections always move against the trend. They typically subdivide into three waves (A-B-C) and give us, the traders, an opportunity to position our trades in the direction of the market's larger trend.
Benefit #3: Elliott wave analysis identifies upcoming changes in trend.
Elliott waves are fractal: Larger five and three-wave structures consist of smaller ones. This lets you gauge the maturity of the trend. For example, if prices are advancing in wave 5 of a larger five-wave advance, and the current wave 5 has already completed most of its smaller waves, you know that this is not the time to be adding to long positions. Instead, some profit taking is in order, or your protective stops need to be raised.
Benefit #4: Elliott wave analysis confirms the resumption of the trend.
Corrections typically unfold in three waves: A-B-C. When an A-B-C is over and price exceeds the extreme of wave B, it implies that the larger trend has resumed.
Benefit #5: Elliott wave analysis provides high-probability price targets.
When R.N. Elliott, the discoverer of the Wave Principle, wrote Nature’s Law, he specifically stated that the Fibonacci sequence was its mathematical basis. Elliott waves, both impulses and corrections, adhere to specific Fibonacci proportions – and those translate into price targets.
Benefit #6:Elliott wave analysis provides specific "points of ruin."
Where are you wrong? That's the eternal question for traders. The Three Rules of Elliott help us here:
Rule 1: Wave 2 can never retrace more than 100% of wave 1.
Rule 2: Wave 4 may never end in the price territory of wave 1.
Rule 3: Out of the three impulse waves 1, 3 and 5, wave 3 can never be the shortest.
Of course, as wonderful as all this sounds, it's just theory. How do you turn it into trading strategies? Practice, practice, practice. The only shortcut I know of is to find a teacher. Then you can r eplace their months (or years) of being beaten by the market with a few days of learning.
When R.N. Elliott, the discoverer of the Wave Principle, wrote Nature’s Law, he specifically stated that the Fibonacci sequence was its mathematical basis. Elliott waves, both impulses and corrections, adhere to specific Fibonacci proportions – and those translate into price targets.
Benefit #6:Elliott wave analysis provides specific "points of ruin."
Where are you wrong? That's the eternal question for traders. The Three Rules of Elliott help us here:
Rule 1: Wave 2 can never retrace more than 100% of wave 1.
Rule 2: Wave 4 may never end in the price territory of wave 1.
Rule 3: Out of the three impulse waves 1, 3 and 5, wave 3 can never be the shortest.
Of course, as wonderful as all this sounds, it's just theory. How do you turn it into trading strategies? Practice, practice, practice. The only shortcut I know of is to find a teacher. Then you can r eplace their months (or years) of being beaten by the market with a few days of learning.
At EWI, we have practiced Elliott wave analysis for 30 years now. Now is your chance to turn theory into practice in a live 2-day setting at our new Intensive Elliott Wave Trading Courses, "How to Trade in a Fast-Moving Bear Market" -- now held in Atlanta, GA, New York City, NY, and London, England. We still have a few seats left.
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