ANATOMY OF A TRADE
The Grand Finale
Trading Wave 3by Mircea Dologa, MD
Trading wave 3 could prove to be the most profitable of all waves in Elliott wave analysis. Here's an example.IN my previous two articles, I discussed various techniques you could apply to trading while a wave 3 was in process. In this, the third and final part of the series, I will walk you through a trade so you can see how to utilize everything I discussed in the first two parts.
GETTING READY
1. Be alert to the possibility of an extended W3 trade:
- Identify the profitable low entry.
- Price should be near the close of the previous day.
- Price should gap down, opening below the close, then return above the close and fill the gap from the low of the day/morning, or vice versa. This is known as the oops phenomenon.
- Price gaps down, consolidates for several bars, then fills the gap from the low of the morning/day. Again, you have the oops phenomenon.
- Follow the price movement from downtrend to uptrend.
- Once a low is formed, wait for an upswing in wave 1/A and its retracement of wave 2/B (38.2 ? 50%). After the retracement, you can set up for the wave 3/C ride.
- Be aware that a low may not necessarily be the starting point for wave 1, but rather the end of wave B of an ABC correction. Wave C will follow, taking the form of a terminal-ascending triangle. A similar situation might take place when an impulse pattern has a wave 5 failure. This will be a classic double-bottom formation.
- Be aware of the formation of w1 of a future W3. It can coincide with the entry (as is the case in the example). The length of the move will give the tone:
o Five bars for a swing
o 13 bars for an average trend, and
o 21-34 bars for an extended wave
...Continued in the September issue of Technical Analysis of STOCKS & COMMODITIES
Excerpted from an article originally published in the September 2006 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2006, Technical Analysis, Inc.
Return to September 2006 Contents