Caution: The trader reading the following article may change their viewing of the markets and start seeing results immediately.
When I began studying Elliott Wave Theory 15 years ago, after memorizing the rules and guidelines, I had to face several challenges. Sometimes, I felt I was wasting my time, and not just feeling this way, I was wasting time. Because learning the rules of Elliott’s theory isn’t enough to find trades that allow for building a profitable system, I think we’ve all been through that moment where we want to run away and leave trading aside.
But I wasn’t going to give up until I found the right way to use Elliott waves because I saw that institutional traders used this tool for their analysis, and I knew the trick was in finding the right way to use the information.
Undoubtedly, the answer lies in having a defined pattern to find the end of the waves. I have dedicated my career to discovering different ways to identify the end of the waves and have an objective trading system based on Elliott waves.
Is the Trend, My Friend? But how can this be possible? Can a trend on the chart be our friend to tell our successes and failures? Will our friendship bonds with the trend make us earn money because she, “the trend,” wants to help us win? The trend is not our friend, nor can we directly converse with it.
To make your life simpler, let me explain something fundamental about the markets in a simple way. Trust me, you will thank me. The trend results from aggressive market orders (buys or sells) that impact the price, and the dealer or market maker does not want to be your counterpart. This causes a shortage, and the price makes directional movements or what is known as a trend. Did I scare you with this explanation? Don’t worry, let’s make it simpler.
Imagine you have a french fries business. One day, thanks to your winning mindset and after months of envisioning a great business, you receive a call from your main customer requesting the biggest order in your company’s history, 20 tons of french fries. When you call your supplier (dealer or market maker) to buy the raw material (potatoes), he informs you that your order is too large and that he can sell you 5 tons at the current price and the rest at higher prices respectively. Thanks to your purchase order, the price of potatoes rises from $5000 a ton to $20000 a ton in a matter of seconds.
Suddenly, all participants start selling because the price is too high, creating a price correction. Still, even with all these sellers (high volume), the price only drops to $18000 because the supplier (dealer or market maker) is buying (absorbing) all those sales and filling his warehouse with tons of potatoes to sell at a higher price.
So, the trend is your friend when “The price corrects (retracts) slowly with great volume, but with little price movement”. That’s when you can identify the dealer buying, and it’s your time to shine; you can go on stage and do your best dance (trading in favor of the previous trend and against the correction).
How are we doing? I hope I’m not boring you with this story, which to me is fascinating, and these small details make a difference when trading. Let’s continue… This is where we can connect the story with Elliott Waves because this theory helps us identify the dealer’s intention (market maker or big guy or whatever name you prefer). The waves tell us if the previous trend (which is in the past) combined with the corrective present is a maneuver by the dealer to absorb those interested in changing the trend and catch them and beat them by hunting their stops (stop hunting).
But everything has a but, right? Elliott’s theory does not show the end of that corrective wave, and there lies the problem because the trader assumes (imagines, expects, bets) that the corrective will end and enters the trade with a large stop loss (just in case the price decides to draw a deeper correction). Two mistakes here: first, a large stop loss spoils the risk-reward ratio, and achieving at least a 1:1 (risking 1 to win 1) will be virtually impossible, and second, you are operating “imagining” something that hasn’t happened (betting). Repeat this formula, and you won’t be a great trader but a great illusionist because your capital will disappear in a dozen trades.
Oh Ok! I’m sure you have these two questions:
- After this explanation, what is the use of Elliott Wave Theory?
- What is the correct way to use it to get ahead in my trading?
You must think I can read your mind, but it’s not like that. I have been immersed in this topic for so many years that I know exactly what you are thinking because I have been in your place.
Elliott Wave Theory is the most powerful tool you can adopt to improve your trading because it gives you the market context; that is, it tells you if the next movement is bullish or bearish, which is the closest thing to time travel.
That’s why every trader must master it to get ahead, but like almost everything in this world, nothing is perfect because it doesn’t tell us when and where to buy or sell (timing). When the trader faces this obstacle, they have two paths: the first is to complain, run away crying, shouting that Elliott Wave Theory is subjective and that they couldn’t master it because it’s very difficult, or to calm down, take a deep breath, and think everything from a different angle.
Then, let’s use what works from the Elliott Wave (context, direction, structure, etc.) and combine it with the best institutional Price Action to find the perfect moment to enter the trade with low risk and a high probability of success. I have dedicated my entire professional career to perfecting the technique and helping thousands of traders master their analysis and trading. In the video accompanying this article,
I will show you a practical case in the S&P500 to illustrate a type of corrective wave, the ZigZag, and how we should trade when it is revealed on the chart.
I congratulate you for getting this far and reading the entire article. Only the most disciplined traders take the time to study topics in depth. I am sure that with this dedication, you will get ahead in everything you set out to do.
I look forward to seeing you in the membership to witness the incredible power of Elliott Wave Theory applied to live markets.