The whole Elliot wave theory has been nothing but helpful to many forex traders; thanks to Ralph Nelson Elliot who made it possible. He thoroughly analyzed 75 years worth of stock data and came to a revealing discovery; which was that the stock market is not at all chaotic. In the time past, before this discovery, it was thought that the stock market was frenzied, that there was not a single pattern base for its activities, and that is was really risky. Today, it is still risky, but the thought of it being chaotic has changed after Elliot gathered enough confidence and evidence to share what he discovered with the world. That was in the 1930s.
USING THE ELLIOT WAVE PRINCIPLE IN FOREX TRADIING
The Elliot wave principle worked perfectly well for the stock market, which was the environment for its development. How well can it work in the forex market, considering that the stock market and the forex market have a lot in common?
The Elliot wave methodology can work really well in the forex market. It can be used to determine the entry, stop loss, and exit points of a trade. To trade the forex market, there is need for
- Trade entry plan
- Risk control plan
- Trade exit plan
TRADE ENTRY PLAN WITH ELLIOT WAVE:
There are three basic steps to follow in generating a position opening plan using the Elliot wave principle. They are
1. From what is obtainable, pick a method for the generation of the Elliot wave count
2. Wait till there is a fifth wave
3. Use a different indicator to confirm the trend
4. You are good to go
Following this step, you can simply open a position with the Elliot wave strategy, but that is not all. There is need to set the risk control plan in motion.
RISK CONTROL PLAN WITH THE ELLIOT WAVE PRINCIPLE:
Here are things you need to do as risk control measures while using the Elliot wave method
- Identify a reasonable stop loss point
- Enter stop loss orders at strategic levels
- On the first good move, take some profits and go ahead to set up a trail stop for the rest of the transaction process
TRADE EXIT PLAN WITH ELLIOT WAVE
There are some measures that must be put in place to exit the whole trade and avoid losing money. Some of them are
- Exit the entire trade if stop loss order is hit
- If the RSI, after three days, is up to 85 or more or more for long trades, 15 or less for short trades, half of the security is sold and trailing stop orders are adjusted. The same applies when the wave count changes from 4 to 5.
- Exit the trade the very next day after the wave count changes from 5 to anything else.
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.