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Best trade

Updated on December 27, 2011

Technical chart

Apple computers (Monthly chart)
Apple computers (Monthly chart)

Best pattern

A high probability trade set up that offers the best risk-reward ratio is the third "Elliott wave". It offers the greatest reward for a minimal risk. This article will allow traders and investors to grasp the essence of successful trading.


Best trade

The trend.

The price does not always trend. During trending phase, it will move in five waves, but the longest wave is the third motion. It is always a trending motion. However, it is necessary to count accurately the first and the following motion. Though these two "waves" are less easily detectable, the third move is usually the most obvious motion. Consequently it is the recognition wave. The first move indicates the start of a trend, but the next move is a contra trend. It is also the first profit taking time. Usually, "MACD" (20, 40, 9) will cross above its signal at the start of the movement and stay above it even during the second wave. However, the second movement must not invalidate the first. To catch the third impulse, one must obtain a strong signal after the second impulse. Contrary to the up trend, MACD (20, 40, 9) usually stays below its signal line until the end of the third wave.

Wave extensions.

Each time that the third wave subdivides into five sub waves, it becomes a "complex wave". In this instance, MACD (20, 40, 9) may still remain above or below its signal line but can repeat the five sub waves. Sometimes, MACD may fail to replicate the price structure due to volatility or lagging effects. A complex "third wave" usually moves along a rising channel in an up mode and declining channel in a downtrend. MACD and the channel are excellent trading tools for the third wave.

Momentum

During the recognition thrust, the momentum is quite strong. As the momentum is increasing, the price will rise above resistances and trend lines in an up trend and drop below supports and trend lines in a downtrend. The momentum surge allows the price to break above (or below) the second wave’s high (or low) in an up trend (or downtrend). Both bullish and bearish momentum are strong during the recognition phase. Most momentum indicators will peak and remain high during this phase.

Overbought or oversold

Many oscillators become overbought in the decisive third impulse and oversold in the negative third motion. One should avoid selling during these false warnings. In fact, it is normal to sell when the oscillators reach the oversold region in a third down move. Many traders wrongly sell in the third up movement and buy in the down third phase. One can avoid these confusions if one learns to understand the Elliott wave's discipline.

Fundamentals

Many investors are technical minded. However, one can improve "trading" or investment decisions by learning to apply thoroughly the "trading triangle". It allows those who understand it to avoid common investment mistakes. It is always advisable to combine both the technical analysis and the fundamentals. Furthermore, one should ascertain that fundamentals are strong during the positive third stage and negative during the down third phase. It is also crucial to pay attention to the fundamentals during the third impulse because one expects the strength to continue for a month at least or more. If a financial instrument starts the third move in an up mode with weak fundamentals, the market will drive the price back below the second wave’s top. However, the price will promptly return above the second wave’s low if a company outperforms after the last disappointing earnings.

Anticipation

"Fibonacci" extensions tools highlight possible price’s targets, overbought or oversold regions. Momentum often stalls in these areas. Some may use channels’ projection to detect these vital "trading zones". Traders often project the consolidation channel (consolidation area before breakout or breakdown). In an up trend, MACD (20, 40, 9) often returns below its signal at the end of the third wave and during the fourth wave. It is an excellent third motion’s trading "tool".

Exit strategy

The first target for a bullish trade is the first and nearest resistance level. On the other hand, the first and nearest support level is the first target for a bearish trade. If one buys successfully at an effective support level in up trend, one should secure gains when the price reaches the first target and vice versa for a sell signal. One can take profit, adjust the stop loss or change it to a break even.

"Swing trading" and position trading

Specialists of the third "Elliott" thrust are swing or position traders. They attempt to amass substantial profit during the longest wave with a minimal risk. These traders are seasonal traders who do not over trade. They understand the third drive and wait patiently for a strong signal when it starts. They always want to join the trade at the best price and the best time. The most important thing for these investors is "value". Many are sophisticated traders who always seek the best value. Though most are technical traders, they combine technical trading with the fundamentals. Best traders identify the origin of a cycle but can also identify the first and second "wave" before the recognition impulse. Traders or investors can achieve consistent winning trades if they can understand and successfully trade the longest wave.


No doubts, the third impulse offers the best reward-risk ratio, however, one should always use the "five per cent money management rules" and stop loss in all trades. It is not sufficient to recognise the third phase but to understand how to trade it successfully. In fact, it is one thing to buy (or sell), but another thing to buy (or sell) at the best price and time. All traders should strive to clearly recognise the "best trade" set ups and improve their trading abilities. This article is for educational purposes only.


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