This is quite useful because we can now break any price trend movement into this basic 5 – 3 wave pattern. Knowing that each impulsive and corrective move is a series of waves oscillating up and down we can conclude that we can have waves within waves.
This means that a five wave sequence in one-time frame might be simply just the first wave in a longer time frame. In other words, this is simply confirming the nature of the markets theory.
Let’s lay down some of the rules of the strategy that can assist us in determining to find good entry points.
- Elliott Wave Strategy Rules
- Wave 2 never retraces more than 100% of Wave 1. Typically, the retracement is between 50% and 61.8% of wave 1.
- Wave 4 never retraces more than 100% of wave 3. Typically, declines between 38.2% and 50% of wave 3.
- Wave 3 always travels beyond the end of wave 1 and it’s never the shortest one; Wave 3 will normally extend 161.8 x
If wave 3 is the longest wave, then wave 5 will roughly equal wave 1.
Wave 2 and Wave 4 will alternate. If wave 2 is a sharp correction, wave 4 is a and vice versa.
After a five sequence is completed the corrective waves usually end in the vicinity of wave 4 low point.
Step #1 Wait until you can spot at least a 3 wave sequence
Step #2 Sell between 38.2% and 50% of Wave 3
Step #3 Place the Protective Stop Loss few points above the Wave 1 Ending Point
Step #4 Take Profit when Wave 5 is equal to Wave 1 or when we break below wave 3
Billionaire hedge fund manager Paul Tudor Jones is well-known for being an practitioner. If the 120th richest person on the Forbes 400 list is using the strategy you should not be the fool who ignores it. The strategy has stood the test of time and if you’re just getting your feet wet in the trading business this is definitely a good starting point if you want to build a fortune.