How to trade breakout using Elliott Wave Theory

Published by professional accountant Ralph Nelson Elliott The Wave Principle in 1938. His pattern recognition theory believes that when the market trend moves in one direction, the market trend will unfold in the form of five waves. basic Impulse and 3 waves oppose that impulse. The theory further stipulates that each wave will be subdivided into three homeopathic waves and two contrarian waves. Finally, it explains a fractal market in which each wave produces similar patterns in lower and higher time frames.

The Elliott Wave Theory (EWT) occupies a strange position in market legends. It takes years for proponents to grasp its secrets, while skeptical observers regard it as witchcraft and support more traditional prices. method of prediction. For many years, Wall Street has been particularly dismissive of this approach, but conspiracy theories still exist, such as unconfirmed reports that major players often consult wave theorists to make key decisions about market risks.

Fortunately, we don’t need to join a secret society, nor do we need to spend ten years remembering a thousand rules and exceptions to take advantage of the power of EWT. In fact, we can now apply three easy-to-understand wave principles to popular breakthrough strategies and observe how they can improve market timing and profit generation. After major lows have occurred and financial instruments have tested key breakout levels, we will look for specific Elliott wave standards.

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After a long rally, Aetna (AET) reached nearly 86 points in July 2014. It was revised with the typical ABC pattern, which closed at 72 in October. The stock rebounded to resistance at its summer high in early November, forming two waves of rebounds and stagnating in the middle of the month. The three EWT principles help us predict what will happen next, because buying resistance shows the contours of the first to fourth waves of Elliott’s 5th wave rally.

We will test this paper by applying the first two of our three principles.

A. Bottom 4day (2nd Selling) Wave cannot exceed the top of 1Yingshi Ocean waves.

The first wave was completed at 79.64 on October 27th. After a rapid decline to 76, the stock magnified to a resistance level slightly above 85. It stagnates at this level, opening up a potential 4day Find a supporting wave near 82.At least so far, specify that there is enough space between the two blue lines at the top of 1Yingshi 4 waves and bottomday Ocean waves. This increases what we are looking for 4day Wave integration will produce 5day Wave breakout and uptrend.

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B. The continuous gap is usually perfectly aligned with the center of 3road (2nd Rally) wave.

When a price increase prints a huge gap and continues to move, doubling its length before the wave appears. This is called a continuous gap, as defined by Edwards and Magee in the book of 1948 Technical analysis of stock trends. Aetna gapped on October 31Yingshi (Red circle) and move on, the level is marked 3road Ocean waves. This is important information in our trading analysis, because it further increases the possibility that sideways price action at the resistance level will produce a breakthrough or even higher prices.

With this information, we canday Waves, looking forward to a breakthrough. If it turns out to be wrong, we can also set a stop loss within the trading range to minimize losses. This brings us to our third and final principle.

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C. Two of the three main waves are likely to be the same in price increases.

We have confirmed and entered 4day Wave trading settings may produce an upward trend equal to the length of the first wave (increased by 7.84 points) or the third wave (increased by 8.81 points). Applying the third principle, we separate the difference and add 8.30 to the bottom of the 4day Fluctuation at 81.93, a minimum reward target of slightly higher than 90 was established.


Bottom line

The stock broke 5day In mid-November, the wave rebounded and hit a swing high of 91.25, which was even higher than our Elliott target. Then, reliable risk management comes into play, because there is no need to sell just because the advancing price has reached a hypothetical end point. In fact, many Elliott waves will bounce higher and higher, especially at 5day Waves, with the disappearance of buy signals and momentum traders flooding into positions.

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