Continuing my series of brief educational posts on “Elliott Wave Cheat Sheet” facts, the third installment describes the “best trades” theoretically you can take within a developing Elliott Wave structure. Refer back to the First Elliott Wave Cheat Sheet: Introduction and then the Second Cheat Sheet: Wave Labeling.
While these might seem counter-intuitive, look really closely at these low risk, high probability opportunities as they develop. Many people who use Elliott Wave do so for key “Sweet Spots” rather than count endless waves incessantly. They’re just looking for a “Third of a Third” or to get short after they think they see a complete 5-wave structure. Use Elliott Wave however you see fit and however it works for you - just like any of the hundreds of technical indicators out there.
The following chart shows the “ideal” trades one can take from a developing Elliott Wave structure:
First, let’s assume that we’re coming off a downtrend, or that the first green arrow up begins after a C wave down has completed. For quick reference, in order from left to right, Wave 1 is up; Wave 2 is down; Wave 3 is large up; Wave 4 is down; Wave 5 is up; Wave A is down; Wave B is up; Wave C is down - I didn’t label them in the chart to keep it from being cluttered.
Many proficient Elliotticians may disagree with me, but I believe it is either impossible or very, very difficult to ‘predict’ or label a first and second wave in real-time - especially for beginners. Elliott Wave becomes much easier once you see a large impulse - which is most likely Wave 3 - and then look backwards and see “Ok, I think I see Waves 1 and 2.” Once Wave 3 is in place, the rest of the ‘map’ is easier. There’s no guarantees, but it’s helpful for anticipating.
Wave 3’s power comes from shorts covering and longs getting aggressive - a ‘point of realization’ occurs… also known as a “Sweet Spot.” Aggressive traders can jump on board there as a trend changes from down to up. Though profitable, this is very difficult in real time.
The way I use Elliott Wave intraday and on shorter time frames is to recognize a large impulse and then wait to buy the first pullback into support. Maybe there will be divergences or price will pullback to a key Fibonacci ratio or a moving average. I don’t yet have a name for it but you’re trying to “Buy at the Bottom of Wave 4 and Trade Wave 5.”
This is a “Pro-Trend” trade and often subdivides into five fractal waves.
The top of the 5th wave often forms a momentum (or volume) or TICK (intraday) divergence into the highs, so it’s often low risk just because of that formation. Once you believe the “5th wave” has completed itself - it takes experience - then exit your long and flip short for an aggressive counter-trend trade.
If you miss the first opportunity, wait for Wave B to rise up and fail to make a new high and then enter short on that pullback. Often, the top of Wave B will form a Cradle Sell Trade and lead to a powerful Wave C trend reversal back down.
Without getting too detailed, here are the key trades to take as you perceive a possible 5-wave structure forming on any timeframe:
Buy as price crests above Wave 1 (this is during wave 3)
Buy as price comes into support after a large impulse Wave 3
Sell Short as price crests with divergences into the peak of Wave 5
Sell Short as price rises but fails to make a new high at the Peak of Counter-Wave B
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