How to Use Elliott Wave Analysis in Forex Trading
For the purposes of this article, we will use Elliott Wave's objectively generated count by ProfitSource's source software by Hubb. The software has automatic algorithms to generate and display the number of waves. It should be noted that the number of options may change dramatically from one day to the next based on the default algorithm, and that other people or programs may arrive at different interpretations of the number of waves and time points certain. The benefit of using this method is to be better or worse, the calculation is calculated using an objective algorithm and not open to subjective interpretation. Before starting any trading, it is important to have a plan in place. So, let's make a direct plan to use Elliott Wave as the base for forex trading market. Here are the steps we will use:
Step 1. Choose a method to generate Elliott Wave count. It may be based on your own analysis, or through some charting or analytics software. As mentioned, we will use the wave count generated by ProfitSource software by Hubb.
Step 2. Wait for wave 5 to begin. In ProfitSource this happens when the wave marked as "3" turns into a wave marked as "4" (this actually shows the end of wave 4 and wave 5). Waiting this to happen can be the hardest part, because this step can take a lot of patience. A single forex market may experience the setup that we are looking for only a few times a year.
Step 3. Look for confirmation of the trend using this indicator or another indicator. Confirmation of Old: After wave 3 above the bar price turns into wave 4 marked below the price bar, we will then assess the following indicators to ensure that long trades should be done ie: a 90 day Commodity Channel Index (CCI) is positive (ie greater than zero) and the relative strength index of three days flips upwards for one day. Both of these confirmation actions should not occur on a day when the number of waves changes from 3 to 4. During both occur at some point before the wave count becomes something other than 4, then the confirmation is considered valid and we will enter a long trade.
Short Setup Confirmation: After wave 3 below the bar price changes to wave 4 marked above the bar price, we will then assess the following indicators to ensure that short trading must be done ie: negative 90 days CCI (ie greater than zero) and RSI three days turned down for one day. Both of these confirmation actions should not occur on a day when the number of waves changes from 3 to 4. As long as both occur at some point before the wave count becomes anything other than 4, then the confirmation is considered valid and we will enter a short trading.
Step 4. Identify a reasonable stop-loss point. For long setup, we will subtract three times the average range of three days from the low that leads to trading as our initial stop-loss point. For a brief setting, we'll add three times the average range of three days to a high level that leads to trading, and use this as our initial stop-loss point.
Step 5. Enter the trading and stop-loss order. We assume that trades enter at the open price the next day. A stop-loss order will also be placed. This command is trailing stop and updated daily when trading is open.
Step 6. Consider taking some advantage in a good first step and stopping for the rest of the position.
Plan Out. If the stop-loss order is struck then all trades out. If the three-day RSI reaches 85 or higher for long trading, or 15 or lower for short trading, or if the number of waves changes from 4 to 5, we will sell half and adjust our trailing stop as follows: For a long time trading we will use a trailing stop that reduces once the average range of three days from the previous day's low. For short trading we will use a trailing stop that adds an average range of three days to the previous day's high. If the wave count 3 turns into something other than wave 5, we will exit the trading the next day.
Step 1. Choose a method to generate Elliott Wave count. It may be based on your own analysis, or through some charting or analytics software. As mentioned, we will use the wave count generated by ProfitSource software by Hubb.
Step 2. Wait for wave 5 to begin. In ProfitSource this happens when the wave marked as "3" turns into a wave marked as "4" (this actually shows the end of wave 4 and wave 5). Waiting this to happen can be the hardest part, because this step can take a lot of patience. A single forex market may experience the setup that we are looking for only a few times a year.
Step 3. Look for confirmation of the trend using this indicator or another indicator. Confirmation of Old: After wave 3 above the bar price turns into wave 4 marked below the price bar, we will then assess the following indicators to ensure that long trades should be done ie: a 90 day Commodity Channel Index (CCI) is positive (ie greater than zero) and the relative strength index of three days flips upwards for one day. Both of these confirmation actions should not occur on a day when the number of waves changes from 3 to 4. During both occur at some point before the wave count becomes something other than 4, then the confirmation is considered valid and we will enter a long trade.
Short Setup Confirmation: After wave 3 below the bar price changes to wave 4 marked above the bar price, we will then assess the following indicators to ensure that short trading must be done ie: negative 90 days CCI (ie greater than zero) and RSI three days turned down for one day. Both of these confirmation actions should not occur on a day when the number of waves changes from 3 to 4. As long as both occur at some point before the wave count becomes anything other than 4, then the confirmation is considered valid and we will enter a short trading.
Step 4. Identify a reasonable stop-loss point. For long setup, we will subtract three times the average range of three days from the low that leads to trading as our initial stop-loss point. For a brief setting, we'll add three times the average range of three days to a high level that leads to trading, and use this as our initial stop-loss point.
Step 5. Enter the trading and stop-loss order. We assume that trades enter at the open price the next day. A stop-loss order will also be placed. This command is trailing stop and updated daily when trading is open.
Step 6. Consider taking some advantage in a good first step and stopping for the rest of the position.
Plan Out. If the stop-loss order is struck then all trades out. If the three-day RSI reaches 85 or higher for long trading, or 15 or lower for short trading, or if the number of waves changes from 4 to 5, we will sell half and adjust our trailing stop as follows: For a long time trading we will use a trailing stop that reduces once the average range of three days from the previous day's low. For short trading we will use a trailing stop that adds an average range of three days to the previous day's high. If the wave count 3 turns into something other than wave 5, we will exit the trading the next day.
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