How Long To Be Short?
If a correction is complete at the W.C high, we would want to only consider
short trades until it appears a five-wave decline is complete. The five-wave
decline should be lower than the beginning of the corrective rally which is
the low point on the chart below.
The market made an almost ideal ABC which probably completed a
W.2 high. The trade below the W.1 low signals W.2 should be complete
and the market should decline to well below the 875.50 low to complete
waves 3-5.
What form should the W.3 take? A W.3 should sub-divide into five
waves. Typically, a W.3 is greater in time and price than the W.1 so the
market should have a long way to decline before the W.3 is complete.
As long as the market does not trade above the W.2 high, short trades
should be taken with a stop no higher than one tick above the W.2 high.
There are a lot of points between where the market is as of the last bar
on the chart below and the probable next low well below the 875.50 low
and not many points to above the W.2 high, the maximum stop on a short
trade. You don’t need to make complicated risk/reward ratios do know this
is a great pattern position for a short trade.
The market declined sharply. As of the last bar on the chart below, a
correction of the same degree as the W.2 or W.2:3 does not appear to
have been made which means W.4 is still to come.
The next chart show the market eventually made a rally at least greater
in price than any since the W.2 high. The assumption is the W.3 is
complete and a W.4 is in progress. The assumption is a W.4 should be at
least a three wave correction. As of the last bar on the chart below, it
appears a W.a of 4 is complete and a W.b and W.c will finish off W.4. A
trade below the W.3 low indicates the W.4 is complete.
The market does not make a typical ABC-W.4 correction but declines
straight below the W.3 low signaling W.4 is complete. From a trading
perspective, we should always anticipate a market will make a typical
wave pattern until proven otherwise. The W.4 rally shown below is not a
typical correction since it is a single wave up. But, it only fits into the larger
degree pattern position as a W.4 so that is how we label it, Elliott wave
obsessives not withstanding.
W.5 appears to be subdividing into five waves as it should. If 814.90 is
the W.4:5 high, a trade above it signals the W.5:5 is complete and the
entire decline from the W.C high is also complete.
The pattern position is now telling us the entire decline from the W.C
high is almost complete. The pattern position gives us a tremendous
trading advantage. If short, we are aware that the downside is relatively
limited and a significant rally is likely to be made soon. We should also
prepare to consider a long trade.
At a minimum, once the W.5:5 low is complete, we would anticipate a
correction of the entire decline shown above. If the low is a larger degree,
we would anticipate an even greater advance.
The following day, the market gaps lower and later in the day trades
above the W.4:5 high signaling a W.5:5 low is complete.
The pattern position suggests we should now only consider long trades
as long as the market does not trade below the W.5:5 low.
If the W.5:5 low was not made at the ideal time and price targets for a
W.5:5 low, we do not have to buy the bottom for a long trade. One of W.
D. Gann’s most useful trading advice was – “The safest trade is to buy
(sell) the first correction to the new trend.” In other words, wait to go long
on the first correction to the new trend.
The Elliott wave pattern position gives us the tools to help identify very
early if a new trend is being made. In this case, the pattern position has
signaled a W.5:5 low should be complete and the trend should be up for
some time.
The initial advance should be a Wave 1 or A which typically subdivides
into five waves. If a five-wave advance is made, it is often followed by an
ABC correction. We would be alert to the pattern of the advance and initial
decline to help identify if a W.C of 2 or B low is being make to position
long.
The chart below shows the idealized pattern. The market may or not
unfold in the idealized pattern but we do have a framework to work with to
prepare for a low risk, high probability long trade.
How Long To Be Long?
If the rally is only a correction, the minimum expectation is for an ABC
which typically subdivides 5-3-5. As long as the market has not traded
below the probable W.5:5 low, we would expect at least a three wave rally
that would be a correction to the advance from the W.C high where the
five-wave decline began.
Lessons Learned
Elliott wave gives us a framework to make a trading decision although it
does not guarantee any particular wave structure will unfold. Remember,
all trading is probabilities. We use Elliott wave pattern analysis to help put
the probabilities on our side.
We use the Elliott wave position to help identify the main trend
direction, the maximum stop loss and what the market must do to be in a
position to complete a trend or counter-trend.
If we don’t expect more from Elliott wave analysis than it can provide, it
will be one of the most important trading tools you use.
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