In this section, we will look at some setups and apply our knowledge of Elliott Wave to determine entry, stop loss, and exit points. In such a moment, wave 2 increases when people who initially bought decide to take advantage, while the newcomers initiate short positions. The first and most immediate one requires identifying where the current price is situated within the current Elliott wave cycle.
Fibonacci targets of resistance are at 1. I entered long on this trade at 1. So I'm moving my stop loss here to breakeven:. NSP has been on a huge monster rally the past several weeks but it has become quite choppy and is starting to roll over to the downside. Today's sharp pop is just an exhaustion rally with the tired and tapped out bulls throwing everything they have at it today for one final push.
The next move of consequence should be to the downside. So I went short with a put spread. Here is the trade:. My above wave count may be a bit aggressive. I think the market will go sideways and then rally somewhere surrounding the Fed announcement.
Impulse waves can be broken down into sub-patterns comprising five structures. These structures are set over three distinctive patterns — namely the extended waves , the diagonal triangle at wave five and lastly the fifth wave failure. Corrective waves can be broken down into six subcategories of waves. The categories are based on the direction and patterns of waves beginning from zigzag , to flat , irregular , horizontal triangle , double three and triple three patterns.
Each pattern provides valuable insight with regards to market cycles and consistency. To fully understand the Elliott wave indicator, it is important to understand the psychological reasoning behind each of these waves, because the zigzag of the prices is the variation of investor optimism and pessimism. In order to identify an Elliott wave the pattern must satisfy the following conditions: A corrective component consisting of three waves implies a countertrend in the opposite direction to its preceding impulse pattern.
The corrective pattern then must satisfy the following conditions: There are other patterns within Elliott waves zigzags, triangles, etc but the impulse and the corrective components are the most used ones when it comes to technical analysis of trends. Wave 1 impulsive is an increasing small wave, a light pressure of demand Bull Move.
In Wave 1, prices rise because of a relatively small number of participants who buy traded currency pairs, for fundamental or technical reasons speculation , pushing the prices up. Wave 2 corrective is a decreasing wave, downward pressure in the supply Bear Move. After a significant growth, investors may receive fundamental and technical signals that the currency was over purchased. In such a moment, wave 2 increases when people who initially bought decide to take advantage, while the newcomers initiate short positions.
Price starts in the other direction but generally does not pass over the minimum initial position which initially attracted buyers at a moment of the wave 1.
Wave 3 impulsive is an increasing small wave in a pressure of the demand Bull Move. It is often the longest of the five waves, wave 3 is a sustained wave when a large number of investors were mobilized by wave 2 to buy. With a larger number of buyers, the safety margin increases, extending above the maximum price originally formed by the wave 1.
At this point, the threshold of resistance is one of support. Wave 4 corrective is a small wave in a supply pressure Bear Move. At Wave 4, buyers start getting tired they remain without money or optimism and again use the over purchasing signals. Generally, there are still quite enough buyers on the market, so here the decrease is relatively small.
Wave 5 impulsive is an increasing small wave in a demand pressure Bull Move. Wave 5 is the final movement of the observed sequence evolution.
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