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.And that s what I m going to show you in this lesson.Over the years that I ve worked with Elliott wave analysis, I ve learned that you can glean much of the information thatyou require as a trader such as where to place protective or trailing stops from the three cardinal rules of the WavePrinciple:1.Wave two can never retrace more than 100% of wave one.2.Wave four may never end in the price territory of wave one.3.Wave three may never be the shortest impulse wave of waves one, three and five.Let s begin with rule No.1: Wave two will never retracemore than 100% of wave one.In Figure 4-1, we have a five-wave advance followed by a three-wave decline, which wewill call waves (1) and (2).An important thing to rememberabout second waves is that they usually retrace more thanhalf of wave one, most often a making a.618 Fibonacciretracement of wave one.So in anticipation of a third-waverally which is where prices normally travel the farthest inthe shortest amount of time you should look to buy at ornear the.618 retracement of wave one.Where to place the stop: Once a long position is initi-ated, a protective stop can be placed one tick below theorigin of wave (1).If wave two retraces more than 100%of wave one, the move can no longer be labeled wavetwo.Figure 4-1Now let s examine rule No.2: Wave four will never end inthe price territory of wave one.This rule is useful because itcan help you set protective stops in anticipation of catching afifth-wave move to new highs.The most common Fibonacciretracement for fourth waves is.382 of wave three.So after asizable advance in price in wave three, you should look toenter long positions following a three-wave decline that endsat or near the.382 retracement of wave three.Where to place the stop: As shown in Figure 4-2, theprotective stop should go one tick below the extreme ofwave (1).Something is wrong with the wave count ifwhat you have labeled as wave four heads into the priceterritory of wave one.Figure 4-24Adapted from The Trader s Classroom Collection: Volume 2published by Elliott Wave International www.elliottwave.com How To Use the Wave Principle To Set Protective StopsAnd, finally, rule No.3: Wave three will never be the short-est impulse wave of waves one, three and five.Typically,wave three is the wave that travels the farthest in an impulsewave or five-wave move, but not always.In certain situa-tions (such as within a Diagonal Triangle), wave one travelsfarther than wave three.Where to place the stop: When this happens, you canconsider a short position with a protective stop one tickabove the point where wave (5) becomes longer thanwave (3) (see Figure 4-3).Why? If you have labeledprice action correctly, wave five will not surpass wavethree in length; when wave three is already shorter thanwave one, it cannot also be shorter than wave five.So ifwave five does cover more distance in terms of pricethan wave three thus breaking Elliott s third cardinalFigure 4-3rule then it s time to re-think your wave count.[January 2006]We hope you enjoyed this free article.If you liked the content contained herein, be sure to check out EWI sTrader s Classroom Collection (http://www.elliottwave.com/products/traderscollection/default.aspx?code=clubewi)ebook.Four years in the making, Trader s Classroom Collection Volumes 1 and 2 feature 128 pages and 23chapters from one of the most experienced Elliott wave teachers, Jeffrey Kennedy.Each chapter gives youvaluable tips and techniques to help you identify turns and trends in the markets.Also be sure to check out Jeffrey s online trading tutorial, How to Spot Trading Opportunities Using the WavePrinciple (http://www.elliottwave.com/education/online_tutorial/default.aspx?code=club).5Adapted from The Trader s Classroom Collection: Volume 2published by Elliott Wave International www.elliottwave.com [ Pobierz całość w formacie PDF ]
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.And that s what I m going to show you in this lesson.Over the years that I ve worked with Elliott wave analysis, I ve learned that you can glean much of the information thatyou require as a trader such as where to place protective or trailing stops from the three cardinal rules of the WavePrinciple:1.Wave two can never retrace more than 100% of wave one.2.Wave four may never end in the price territory of wave one.3.Wave three may never be the shortest impulse wave of waves one, three and five.Let s begin with rule No.1: Wave two will never retracemore than 100% of wave one.In Figure 4-1, we have a five-wave advance followed by a three-wave decline, which wewill call waves (1) and (2).An important thing to rememberabout second waves is that they usually retrace more thanhalf of wave one, most often a making a.618 Fibonacciretracement of wave one.So in anticipation of a third-waverally which is where prices normally travel the farthest inthe shortest amount of time you should look to buy at ornear the.618 retracement of wave one.Where to place the stop: Once a long position is initi-ated, a protective stop can be placed one tick below theorigin of wave (1).If wave two retraces more than 100%of wave one, the move can no longer be labeled wavetwo.Figure 4-1Now let s examine rule No.2: Wave four will never end inthe price territory of wave one.This rule is useful because itcan help you set protective stops in anticipation of catching afifth-wave move to new highs.The most common Fibonacciretracement for fourth waves is.382 of wave three.So after asizable advance in price in wave three, you should look toenter long positions following a three-wave decline that endsat or near the.382 retracement of wave three.Where to place the stop: As shown in Figure 4-2, theprotective stop should go one tick below the extreme ofwave (1).Something is wrong with the wave count ifwhat you have labeled as wave four heads into the priceterritory of wave one.Figure 4-24Adapted from The Trader s Classroom Collection: Volume 2published by Elliott Wave International www.elliottwave.com How To Use the Wave Principle To Set Protective StopsAnd, finally, rule No.3: Wave three will never be the short-est impulse wave of waves one, three and five.Typically,wave three is the wave that travels the farthest in an impulsewave or five-wave move, but not always.In certain situa-tions (such as within a Diagonal Triangle), wave one travelsfarther than wave three.Where to place the stop: When this happens, you canconsider a short position with a protective stop one tickabove the point where wave (5) becomes longer thanwave (3) (see Figure 4-3).Why? If you have labeledprice action correctly, wave five will not surpass wavethree in length; when wave three is already shorter thanwave one, it cannot also be shorter than wave five.So ifwave five does cover more distance in terms of pricethan wave three thus breaking Elliott s third cardinalFigure 4-3rule then it s time to re-think your wave count.[January 2006]We hope you enjoyed this free article.If you liked the content contained herein, be sure to check out EWI sTrader s Classroom Collection (http://www.elliottwave.com/products/traderscollection/default.aspx?code=clubewi)ebook.Four years in the making, Trader s Classroom Collection Volumes 1 and 2 feature 128 pages and 23chapters from one of the most experienced Elliott wave teachers, Jeffrey Kennedy.Each chapter gives youvaluable tips and techniques to help you identify turns and trends in the markets.Also be sure to check out Jeffrey s online trading tutorial, How to Spot Trading Opportunities Using the WavePrinciple (http://www.elliottwave.com/education/online_tutorial/default.aspx?code=club).5Adapted from The Trader s Classroom Collection: Volume 2published by Elliott Wave International www.elliottwave.com [ Pobierz całość w formacie PDF ]