6 Ways Elliott Wave Helps You Trade Better

To quote Robert Prechter, "The Wave Principle falls well short of providing a crystal ball, but it is the very best financial market model available."



By Vadim Pokhlebkin

Whether you're new or experienced Elliott wave user, you know that it's easy to follow professional wave counts in market charts. It's doing them on your own -- especially in real time, while you're trading -- that can be a challenge. Yet learning Elliott is well worth it. Why? 

The following is adapted from Jeffrey's popular 2-volume Trader's Classroom collection.

Elliott Wave Benefit #1: It identifies the trend.
Elliott wave analysis is based on two types of wave development: impulsive and corrective. Impulse waves are five-wave moves (labeled 1-2-3-4-5) that identify the direction of the larger trend. In other words, a five-wave advance tells you the trend as up and a five-wave decline tells you it's down. As traders, we always want to trade in the direction of the trend. We want the wind at our backs: That is the path of least resistance. For example, the probability of success is much greater if you are long a stock when all major indexes are also rallying.

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 -- i.e., self-repeating on all degrees of trend. This enables you to identify the maturity of the trend. For example, if prices are advancing in wave 5 of a larger five-wave advance, and wave 5 is close to completed its smaller 5-wave impulse -- as a trader, you know that this is not the time to be adding to long positions. Instead, it's time to think about money management: maybe take some profit or at least raise your protective stop.

Benefit #4: Elliott wave analysis confirms the resumption of the trend.
Corrections typically unfold in three waves (labeled A-B-C). When wave C exceeds the extreme of wave B, thus confirming the pattern as a three-wave structure, it implies that the larger trend has resumed.  

Benefit #5: Elliott wave analysis provides high probability price targets.
When R.N. Elliott wrote Nature’s Law, he specifically stated that the Fibonacci sequence was the mathematical basis for the Wave Principle. And as time has proven, he was right. Elliott waves, both impulses and corrections, adhere to specific Fibonacci proportions.

Benefit #6: Elliott wave analysis provides specific points of ruin.Where are you wrong? This seems to be the eternal question for traders. And once again, Elliott wave analysis provides us with the answer via the Three Rules of Elliott:

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.

Bottom line, wave analysis is not a crystal ball, but it will help you accomplish three crucial goals: Identify the trend, stay with it, and get out when the trend is likely over.