Faces of Waves Illustrated [3] - Motive wave

(Previous article is here)

So far, we memorized the basic six patterns of the waves. We also learned the basic labeling rules. We observed that wave has fractal structures, and we learned how to count sub-waves in a wave. I also hinted that there are rules and guidelines in which wave patterns comes after which. From this article, we focus on the detailed observation of each wave pattern, and I will present practical trading ideas.

Anatomy of motive wave

First, let’s take a look at motive waves. A motive wave has a clear direction. For an upward (bullish) wave, it always starts from lower and end higher as in this picture.

motive

As I mentioned before, motive waves has 5 waves. For upward waves, Waves 1, 3, and 5 are upwards, and Waves 2 and 4 are downwards. For downward waves, 1, 3, and 5 are downwards, and 2 and 4 are upwards. (I will not explicitly explain downward counter parts from now. Just flip the picture 180 degree in your mind.) Not all 5 waves sequence are qualified as motive waves, and it has to follow these rules to be qualified as motive:

  • Wave 2′s end point must not go beyond Wave 1′s start point
  • Wave 3′s end point must go beyond the Wave 1′s end point
  • Wave 4′s end point must not go beyond Wave 2′s end point

In other words, there are always gap between start point of the motive wave and Label 2, between Labels 1 and 3, and between Labels 2 and 4. And the Labels 2, 3, and 4 must be higher than its counter part. (see the chart indicated as “critical gap”.

Trading ideas in motive wave:

Because of the directionality of motive waves, it is easier to determine whether you want to buy or sell, and the trading success rate will simply go up if you trade on this wave. In fact, I never trade in corrective wave unless I find a motive wave within the corrective wave (Remember the fractal structures?). My trading plan is always focused around the motive wave. It’s a very important point to become a profitable trader using Elliott wave principle!

To present a concrete trading idea, I need to go into the details of two motive wave patterns: impulse and diagonal, so the readers have to be patient for now. But here is one thing worth remembering:

Now imagine you draw two straight lines for a motive wave. The first line passes Labels 1 and 3. The second line passes Labels 2 and 4. Those are called trend lines, and once defined they act as resistance and support. It requires more buyers for the price to go above the resistance line, and it requires more sellers for the price to go below the support line. So, the buying or selling energy are often not higher enough, and we see the price is bouncing against the narrow corridors defined by those two trend lines. So here come the ideas:

  • If you want to buy at dips, look for support line.
  • If you want to sell at rally, look for the resistance line.
  • If you want to set a loss cut line on your existing long position, look for a clear break of the support
  • If you want to set a loss cut line on your existing short position, look for a clear break of the resistance

Just one note for downward trend. No matter whether you are looking at upward or downward motive wave, a resistance line is always the trend line above the price level, and opposite for a support line.

In the next article, we will look at the first kind of motive wave: impulse wave.

$EURUSD Initial profit take target at 1.4280

The unrealized profit of my EURUSD short position briefly went over 5% of the capital on Friday session. Undisciplined trader would have already started to fear of potential reversal, but I am just sitting tight towards my initial profit taking level. All I did was to move my stops to 1.4450.

In the chart, it is clear that EURUSD marked blue underline iii at 1.4330, exactly I had anticipated in the previous post. (I changed the label from 3 to iii, it was my mistake.)

20100115-eurusd-60min

So, my confident level on the analysis is still held high, and I believe the current rebound is the initial wave of blue underlined iv corrective wave.

After the correction, I am seeing two fibonacci support levels almost coincides, and a trend line support is passing through. So, this is most likely where the blue v (= black 3) stops. The price level is 1.4260 to 1.4290. Also note, as I showed with a purple arrow, at this price level, EURUSD would have traveled the same distance as the purple .1 wave. So I am planning to take the profit of one half of my positions here.

Using 1.4290 as the reference level, I measured the descent from 1.4580. 50% retracement is at 1.4434, which is just below blue underlined i. This is how I came up with my new loss cut line that I mentioned at the beginning of this post.

After black 3, I would expect the corrective wave of black 4 (most likely to be complex wave), and it should carry EURUSD up to 1.4400. I will observe this wave carefully, and if it will act as I am expecting, I will consider selling more EURUSD before the final descent towards black 5.

This is all for the analysis now, and let me make one announcement. (Click the image below)

Make money and give back for a good cause!

$EURUSD Now I can say it is a winning trade. A post on the retrospective of the risk assessment.

Is it a luck? Whether or not EURUSD started to be sold badly here could have been luck…at least to some extent.

But anticipating the possibility, carefully determining when to enter the market, assessing how much risk involved and how big position one could take are all about one’s effort.

Now, I am entitled to move to my loss cut line to 1.4517 that is average entry level of my short positions. So, my trade is now risk free.

Some retrospect on my preparation:

  1. I had to change my Elliott wave count three (!) times before this one hit. For the count version 1, I actually profited over 100pips although my count later was rejected. For the latter 2 counts (this and this), I had set stop sell entries that did not get filed (fortunately). So I did not lose any money while my count was not ultimately correct, but I made bucks.
  2. After getting the rain checks from the market, I convinced that the chances are higher on the next one, so I planed to risk about 2% of the capital on this trade.
  3. After the 1.4580 peak, I passed the first wave going down (black 1 in the chart) following my trading rule.
  4. When black wave 2 came close to 1.4580 peak but losing the momentum, the loss cut size came very small. Looking the uptrend losing momentum, I decided it was the time to sell. So, I sold at 1.4546 with 1.4590 stop. It was 44pips potential loss, so I adjusted the lot size so that max risk at this time will be 0.7% of the capital (the hard number is not really the point I am trying to make here).
  5. Then I set stop selling order at 1.4490 with stop loss at 1.4565, assuming what we see now as black 2 label as the presume peak. So it was 75pips max loss. I risked 1.1% of the capital here.
  6. This morning I moved all the stop to 1.4560 because by then it was clear black 2 had been defined.

20100114-eurusd-60min

Real time trading tweets

The plan in the article may get rejected any time, so please check out my tweets on Twitter.

Current risk exposure:

"","","","","$29,058.30","","","","","","","","","","","","","","","","","","","","41.95%","","","2.00%","","","","","","","","","","","","","","","","","","","","","","","","","","","",""
Rational Move always use stop loss orders, and this is the worse case potential loss over the capital for the currently open positions. This is unrealized loss is less or equal to the risk exposure.

Capital growth

From recent 100 trades (%) The growth right before the 1st trade is set to 0%.
About this graph

Drawdowns

From recent 100 trades (%)
About this graph

Total returns

Since inception
(Aug 10, 2009)
Year-to-date Quarter-to-date
0% 0% 0%
This is a normalized value: the return on each trade is normalized against the capital just before the trade execution. This way, it is eliminating the effect by the capital change from deposits and withdrawals. The calculation thus reflects the trading performance of each trade. The value does not contain unrealized profits and losses. RM's trading strategy never risks more than 5% of the present capital. Not including subtraction by tax.

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