I wanted to highlight the near perfect Elliott Wave structure that formed intraday on SDS (S&P 500 UltraShort), including a focus on trading opportunities and set-ups within the developing wave structure.
(Click for larger image)
First and second waves are notoriously difficult to predict or trade, but once you know what you’re looking for and how to recognize a powerful Third Wave, a few excellent trading opportunities open up that you miss if you’re not applying some sort of Elliott Wave analysis, even intraday.
Notice the “Third Wave” on this chart and how it subdivides - in my opinion, third waves hold the key to real-time analysis and trading with the Elliott Wave principle.
If you do recognize that a third wave is underway, you can trade that structure, though two specific opportunities arise if you correctly identify the developing structure.
First, you can (in this case) Sell-Short on the “A-B-C” three-wave pullback that comprises Wave 4.
Second, you can buy (trade aggressively counter-trend) if you recognize a full, 5-wave structure has completed.
Both of these ‘trades’ have excellent risk-reward (tight stop relative to the target if the wave structure plays out as you expect), meaning they have edge from the monetary standpoint.
You don’t have to be an Elliott Wave purist to recognize these opportunities and use them as confirmation to the analysis you’re already using. Maybe your stochastic showed an overbought reading at the A-B-C peak of Wave 4. Maybe we pulled back into key resistance you identified (Fibonacci and Elliott Wave work well together).
No, Elliott Wave is not perfect, and no, you won’t win on every trade, but no indicator or trading system can give you that. To me, getting the ‘main idea’ is more important than absolute precision in your wave-count. Do the best you can with the data you have and don’t get discouraged.
For me, it’s a compliment to all the analysis and trading I already do, and I might use higher leverage if I feel I’m identifying an Elliott Wave structure in real-time (provided a trade sets up according to my parameters). Often, Waves 2 or 4 (which form “ABCs”) will correspond with a bull or bear flag. Sometimes Wave 2 retraces to form the “Cradle Trade.”
In the end, we’re looking to assess the probabilities of the next likely price swing, and then position ourselves with a stop-loss that is smaller than our profit target, and using money management to make sure that if we take an expected loss, then it won’t damage our portfolio.
I’ve been using Elliott Wave in some capacity for just over a year now (thanks to the Chartered Market Technician coursework - I was very, very skeptical it had any value before that) and I have found it compliments my trading and analysis very well. It’s just one more tool in an ever-increasing personal toolbox of methods and strategies - I hope you can find benefit in it as well.
Corey Rosenbloom
Afraid to Trade.com
Follow Corey on Twitter: http://twitter.com/afraidtotrade
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