HOW CAN YOU USE ELLIOTT WAVE TO PREDICT TRENDS

Everything you have read so far is the background in brief to the Elliot Wave principles. Many traders do use these studies, and are indeed profitable. However, when these principles are combined with the Elliot Wave indicators, you have a powerful and unique trading technique, which can be extremely profitable. Most charting software will have these Elliot Indicators as part of their advanced packages.

The three Elliot Wave indicators that I often use are;

Elliot Wave Trend (ET) Æ TREND

Elliot Wave Number (EN) Æ WAVE COUNT Elliot Wave Oscillator (EWO) Æ MOMENTUM Elliot Wave Trend (Abbreviated ET)

ET will measure whether the trend is positive, negative or neutral. ET trend of 1 will mean that the trend is positive, ET of –1 means that the trend is negative, and ET of 0 shows that the market may be flat or sideways.

In the above chart the trend changes to negative on the 11th May 2005, on a 60-minute chart – GBPUSD. The candle closes at 1.8742.

The Trend stays negative until 18th May 2005 and the candle closes at 1.8393.

A move of 349 pips.

Elliot Wave Number (EN)

The Elliot Number can read 1,2,3,4 & 5. These numbers correspond to the Elliot Wave, as described above. Therefore you can place an entry order when EN changes, i.e. say EN changes from 3 to 4. The Entry order is for the open price in the new EN. It is important that your order is filled at the early trend start, if your order is not filled within the next 3 or 4 periods, then you should cancel your entry order. As after 4 periods, either you have missed the trend or the trend will be reversing. This is one of the most important indicators. For this you should try and use the default ET settings on your chart – which will be 70,20. This basically means that the software needs 70% match of the Elliot Wave profile, and 20 of the most recent periods to calculate this number.

I find that this indicator works brilliantly in an up trend, which would be getting the wave 3, which is the longest.

In the above example of CHFUSD, the EN changes to 3 on the 11th of May, the candle closed at 1.2065. The EN Indicator changes to 4 on the 16th May 2005, the candle closed at 1.2221.

The total movement between the two numbers was 156 pips.

Elliot Wave Oscillator (EWO)

This indicator measures the momentum of a trend, i.e. how fast or slow the trend is splitting apart or coming together. This indicator is either positive or negative. If this number drops below 0, you may want to close your long position, or if the number goes above 0 then you may want to close your short positions. Any EWO greater then +. 001 is a strong positive signal and an EWO of less then -.001 is a strong negative signal.

The above chart represents a 60-minute time frame on GBPUSD, between 5th May 2005 and 22nd May 2005.

On 11th May EWO moves from a positive number to a negative number, i.e. below zero. The candle closed at 1.8732.

If at this stage you were already short, then the change in this indicator would have kept you in the trade.

The EWO moves to above zero on the 18th May 2005. So if you were short at this stage, you could consider closing shorts and taking profits. The candle closed at 1.8380.

The move between 11th May when the EWO turns negative, to 18th May when the EWO turn positive, was 352 PIPS.

When all these indicators line up, there is a very high probability of predicting the trend, up or down. If all the indicators do not line up, then the certainty of forecasting the trend becomes difficult. The fact that the indicators do not line up does not necessarily mean that the trend will not move in the direction, which was anticipated, therefore by following all three indicators, you will miss out on some of the trends.

Your most profitable trade

This would simply be the strongest trade indicated by this method; this trade is where there is- 1. A New EN of 3, i.e. moving from 2 to 3. Since wave 3 would be the longest of all cycle

this will produce you the most gain.

2. An ET of 1, since this being a positive

3. A positive EWO – the more positive the better.

LONG POSITION – i.e. when you will be buying the stock, to exit you have to SELL to close your original position. So you buy when you expect the price to go up, and sell it to close your position.

For Long positions you are expecting EN of 3 or 5 (remember UP waves), ET must be 0 or 1, and EWO must be positive. These 3 things must happen simultaneously. Once these 3 indicators line up you should look for a good opportunity to go long. The price to close your position is the open price of the first period where EWO first became negative. An EWO decline to below 0 is enough to tell us that the price may retrace, so you should book your profits!

SHORT POSITION – i.e. when you sell the stock that you do not own. You are expecting the price to go down so that you may buy it back at a lower price. This is opposite to the Buy signal.

Here you are looking for an EN of 4 (downswing), ET must be –1 or 0, and EWO should be negative. When EWO is negative it means that the trend should diverge away from 0 in a negative manner, i.e. go down. These 3 things must happen simultaneously. Once these 3 indicators line up you should look for a good opportunity to go short. To Buy back we just look for EWO to rise above 0, this is enough to tell us that we are headed up from here. The price to Buy-back is the open price of the first period where EWO first became positive.