PRICE ACTION PATTERNS APPLIED TO ELLIOT WAVE PRINCIPLE
What makes a complete trader? In my opinion, a good trader is someone who understands different trading systems and uses them to get one killer strategy. We know the power of Elliot wave that it great at telling us where we are in the market, where we coming from and where we are going. Once you know where you are going, which is the future you need to find a way to make money now because analyzing for years without making money is useless. We need to find good entries in the market that enable us to have a small risk with big rewards, yes it possible. I remember when I first started I used to hear other amateurs saying that no one has a risk to reward of more than 1:1. They believed that you are lying if you tell them in your trades you are always around 1:4 and upwards in your risk to reward ratio. Today I’m going to introduce you to price action patterns that work well with Elliot wave, and how do we use them to get good entries in the market. Understanding different price action patterns improve your knowledge as a trader, you must always strive for perfection in your trading which is hard to achieve but I believe it possible. These price action patterns are good reversal sign in the market so it very important to spot them early so that you can place your trades with small stop loss and big take profit. Let start with famous HEAD AND SHOULDERS pattern.
HEAD AND SHOULDERS
Since you went through the course the diagram above should be familiar except that now it has head and shoulders included. They are different ways to trade this pattern, one is to wait for it to reach where I marked x-x and sell it on a breakout. A lot of price action traders trade it like that which is the safest way and the one with fewer pips. So since we are always aware what the markets are doing as Elliot wavers, we know that once wave B start it usually finish around 61.8% retracement to 100% retracement of A. We do our correct counting of wave B and get point likely to cause reversal, if the right shoulder is around the resistance of left shoulder we see that as great point to enter with small stop loss and guess what most of the times the resistance hold on and price drops, usually when they are more resistance in the past the better our chances of reversal. By the time others are reacting about the price fall we are already in profit, and the price keeps on dropping since we are in Wave C.
Wave C is usually 5 waves in a zig-zag pattern, wave 3 of wave C usually end around the resistance of the neck in head and shoulders. People who trade head and shoulders the old way have experienced that they sell in the neck and price reverses first before dropping, well that wave 4 of wave C. If you already in the trade that doesn’t affect you that much as you will wait for the trend to continue downtrend. Another question that usually comes is where you take your profits in head and shoulders pattern, price action trades measure the price from neck till top head and they project that downtrend which is ok but us we have a Fibonacci tool so we measure it like any normal wave c. We are going to use Fibonacci extension tool from wave A and measure 1.61% retracement. Taking our profits there is safer than waiting for the price to surprise us and reverse to start another impulse wave. Please keep in mind that this work for bullish or bearish markets. Now let look at another price action pattern.
DOUBLE TOP AND DOUBLE BOTTOM
One thing you should have picked up in the image above is which correction pattern that is most like to produce double tops, well that flat pattern. How do you spot a flat pattern so that we can execute a trade at the right time? Well, it easy you spot it the same way as any other flat pattern. Notice that wave A has 3 sub waves same as wave B, and wave C has 5. Once you spot that wave B is also 3 sub waves and they end around resistance of wave 5. Just know you have a double top in your chart just wait for it to reach resistance price point and execute the trade with small stop loss. Imagine the risk to reward that you get from that. Let say you placed your take profit and the start of wave B. If the trade goes your way you are looking at 1: 8 risk to reward ratio. If you ask me that an excellent one your account will move forward very fast if you can be consistent in your counting.
Conclusion: understanding these pattern will help you to place a trade and quickly becomes in profit, have you ever wondered how some traders place trades and they immediately turn to blue or profit. That is called experience knowing when the right time to execute a trade is, if you work on your charts over and over again you will reach that level. Please note all this is dependent on your understanding of the Elliot wave principle and applying it correctly, because if your counting is wrong the price will keep on moving upwards (bullish)or bearish depending on the trend and you will be left surprises as to what happened.
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