Elliott Wave

Elliott waves should be a necessary part of your overall trading method.

 

You will find that very few Elliott wave traders

can ever agree on what wave pattern they are in, until it’s all over. Two

Elliott wave technicians can look at a chart and both of them can see two

different patterns. This Page expalins a practical way to use the Elliott Wave
Theory in conjunction with other  time and price points tools.

About 50% of the Elliott Wave techniques are simple and clear and the

other 50% are complex, too difficult and subject to differing interpretation

among Elliott wave technicians. For the Gann trader, the best approach is to

use the 50% that are simple and clear. Elliott waves should be a necessary part

of your overall trading method. Gann time and price points tell you where the

market has been and were it is going. The Elliott Wave Theory tells you where

you are on the road map. It can be used very nicely in conjunction with the

other Gann time and price points. The Elliott Wave Theory used alone, will

get traders into big trouble as they are constantly relabeling waves to fit the

pattern that they currently see. The Elliott wave approach we recommend will

work most of the time in conjunction with other Gann rules and help to put

the whole puzzle together as to where you are in the overall trading structure

of the market.

BASIC RATIO DIFFERENCES

Fibonacci .382 - .618 - 1.00 - 1.382 - 1.50 - 1.618 etc.

Gann .25 - .33 - .50 - .66 - .75 - 1.00 - 1.25 - 1.33 etc.

As you can see the Gann ratios are very similar to the Fibonacci ratios

used by Elliott wave traders.

Elliott waves can be classified into two basic parts (See Exhibit 7.1):

1) The impulse pattern that is in the main direction of the market that

ends at a Gann time and price level

2) The corrective pattern that the market will retrace to some important

 

THE IMPULSE PATTERN

Impulse patterns consist of usually five waves in the main direction of the

market. That main direction of the market can be either up or down.

1) The first wave of an impulse move is usually not very strong as traders

are unsure of where they are in the market.

2) After the first wave runs up to the top of wave 1, it will pull back

usually very quickly and violently and test the bottom and hold without making

a new low. This is wave 2. Traders are still bearish and are short and

thinking the market is still going lower. Some may even add to their shorts.

Most short traders will now have their stops above wave 1.

3) The beginning rally of wave 3 is usually very slow and will finally

make it up to the top of wave 1. Traders are still bearish and many have added

to their short positions. There are a large amount of stops above wave 1. The

rally of wave 3 continues and pushes above wave 1 where there are a tremendous

number of stops. When these stops are hit the market explodes and many

times gaps up because of order imbalances. The gaps are a main indication

that you are in wave 3. The volume increases and many other traders get on

the bandwagon and start to buy. Traders that were long at the bottom start to

add to positions. Traders that were short that got stopped out decide that market

is also going higher and they take long positions. At this time, the majority

of traders are now long and the market is in a main trend up. Wave 3 is

always longer than at least one of the waves 1 or 2 and it can never be the

shortest wave of the three.

4) Finally the buying of wave 3 starts to subside and profit taking starts to

come in. Traders who were long at the bottom decide to take profits, or they

might put in close stops to protect their profits. This causes a general orderly

pull back which is wave 4. Notice the differences between the wave 2 pull

back and wave 4 pull back. Wave 2 was fast and violent and wave 4 was

orderly. Gann knew what wave the market was in, because of the wave’s characteristics.

Most traders are still bullish in wave 4 and many take this opportunity

to add to their positions and many that missed the entire move, decide to

enter the market in wave 4. Wave 4 should never come down under the peak

of wave 1 in cash markets, but it can come down 10 - 20% under wave 1 in

futures markets, because of car-

rying and storage charges.

Hence, A general form of an Elliott wave would similarly look like this.

5) The market now starts up in its wave 5. It does not have the power that

wave 3 had because of the stop buying and new initial longs being taken.

When the market hits the top of wave 3, it usually goes through, but not with

a lot of enthusiasm. The rally is very lackluster. The prices make a new high

and that is the top of wave 5 and the market tops out.ELLIOTT WAVE THEORY

CORRECTION PATTERNS

Correction patterns usually consist of three waves. They come in two different

categories: the simple correction and the complex correction. If wave 2 is

a simple correction then expect wave 4 to be a complex correction. If wave 4

is a simple correction then expect wave 2 to be a complex correction.

THE SIMPLE CORRECTION

The simple correction that which has only one pattern which is the zigzag

correction. This is an a, b, c correction. Wave b will correct 1/2 - 3/4 of wave

a. If it exceeds that correction then it is not a simple correction, but a complex

correction. Wave a will always have a 5 wave pattern in the direction of the

correction. Wave c will go below wave a. Wave c will be equal to wave a or

1.5 to 2.5 times of wave a. The way to know if you are in a zigzag correction

is to determine if wave a has a five wave pattern.

To be continued...

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TWO BASIC WAVES