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Talking Points:

-Elliott Wave Overview

-Placing Stops with Elliott Wave

-Example with AUDUSD

"The Wave Principle is a simple rule-based methodology (3 rules) that allows the practitioner to dissect the collective ‘mindset’ of the market’s participants, which allows for defined, attractive/positive risk-reward trading/investing parameters--A game plan."

--Andrew Baptiste, Chief Technical Analyst, Morgan Stanley (1999-2011)

One thing you can almost always count on with Elliott Wave is that it is a controversial subject when brought up in a room of traders. One side argues that human nature and mental biases are much too abstract to move how Elliott Wave Theory says they often move. The other side argues that the beauty of Elliott Wave Theory is that within all the different news prints, sentiment indicators, and headlines, there is a limit to optimism and pessimism regardless of the environment and Elliott Wave is an effective frame work from which a trader can build an outlook to trade while managing risk.

See Also: How to Understand the Three Building Blocks for Trading Elliott Wave

Elliott Wave Overview

Courtesy of DailyFX Plus On-Demand Course

In its simplest form, Elliott Wave is a trend trading timing tool. Elliott Wave is a trend trading tool in that it is built off of the concept that markets move in an uptrend with a set of higher lows and higher highs during times of optimism and conversely, markets can move with a set of lower highs and lower lows in times of pessimism. Elliott Wave is a time tool because it can help you identify common areas where a counter trend move is exhausted before the trend resumes. In the end, it’s a probability game so it’s critical that you trade with a favorable risk-reward ratio and that you are able to recognize common trend-correction patterns.

Sell Also: What Are the Traits of Successful Forex Traders?

How to Place Stops with Elliott Wave

Revisiting the prior argument, there are often intense views of Elliott Wave. However, if you keep an Elliott Wave count of the market to put the current move in context, you should have a point of invalidation or a price at which your view would be invalidated should the market trade there. That level of invalidation can and should act as your stop placement.

If you're still in a trade when your wave count is invalidated, you're like a fish out of water.

Taking this further, if you keep track of the 3 Cardinal Rules of Elliott Wave, you can use them to place a stop on the market your trading

3 Cardinal Rules of Elliott Wave

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.