Elliott wave trading mistakes
Apart from the third Elliott wave, the fifth Elliott wave is one of the easiest recognizable impulse waves. However, day and swing traders often put themselves on the wrong side of the financial markets during the fifth Elliott wave. In five steps, this article will help Elliott traders to stay away from the common fifth Elliott wave trading mistakes.
Understanding Trading Activities
During the bullish fifth Elliott wave, most hedge funds, investment banks and big financial institutions begin to sell overbought financial instruments. They sell throughout the fifth Elliott wave while the price is still rising. As astute financial market players, they often hide their footprints. Consequently, other average market players are unaware of the latent distribution that is taking place.
To avoid falling into that bullish trap, one ought to realize that limit orders attract the price like a magnet. Moreover, the objective of the smart money is always to sell at the highest price, but technical traders prematurely sell while there are still orders to sell far ahead. Those smart market orders reside above the forecast fifth wave price target.
Therefore, the best approach is to highlight the forecast fifth wave peak, while one remains calm until the second wave of the expected correction is in place. Surely, that prudent trading approach allows one to sell only after the major financial institutions reveal their intention to sell.
Influence Of The Market And Its Leaders
Another false step that Elliott wave traders take during the fifth Elliott wave is to ignore the market and its leaders.
Quite often, one will correctly forecast the end of the fifth Elliott wave, and sell after adopting a top down trading strategy. However, if one ignores the market or market leaders, one may wonder why the bullish trend resumes after the initial bearish trading signal.
Indeed, the market and its leaders can help an individual financial security that will quickly turn bullish after a slight bearish retracement. For example, a NASDAQ-100 index stock in the fifth wave may quickly turn bullish one more time after one sells it in the fifth wave if both Apple and Google stocks are extending their bullish momentum. Similarly, a bullish fifth Elliott wave that is temporarily bearish can resume the bullish rise if this time the sector itself does not show any signs of weaknesses.
At the peak of the fifth Elliott wave, the RSI oscillator and other technical indicators are divergent. A clear-cut bearish RSI divergence is commonly in place near the end of the bullish fifth Elliott wave. Therefore, many RSI and technical traders who are trading the indicator instead of the price will sell at the wrong time and price. They usually ignore the depth of the trading activities that is taking place, but also the influence of the market and its leaders.
To avoid those pitfalls, one ought to take into consideration other factors or market indicators before using a top down trading strategy. The price will not decline until there is a valid bearish trading signal in place. Though, the fifth wave is the last lap of the trend, and there is a bearish divergence, one ought to follow the correct trading drill before rushing to sell.
Avoiding The Madness Of The Technical Trading
Indeed, the aberration of technical trading consists of relying solely on the technical indicators, and their signals (warnings) while ignoring the core value analysis and the financials. To avoid trespassing the fundamentals analysis rules, and commit a prominent technical trading error, one must never sell anyhow at the end of the bullish fifth Elliott wave. It is prudent to first check the fundamentals at Google and Yahoo finance even if there is a high probability trading set-up.
At this point, it is clear that an Elliott wave trader will only become eager to sell at the end of the second minor wave of the correction.
Note also that fundamentals usually peak (overbought) at the end of the bullish fifth Elliott wave, therefore one must also rely on the change of the market sentiment before taking a drastic bearish trading decision. Generally a bullish stock becomes weak if the market sentiment intrinsically turns bearish. In that instance, though the fundamentals are still strong or have peaked, the prevailing negative market sentiment will allow traders to sell it.
Equally, there are bullish fundamental traders who ignore that the fundamentals can peak ( asset is fundamentally overbought and overpriced). Those die-hard bulls or crazy market participants often continue to buy. They also tell those who trust them to do the same. Finally, those irrational optimism often causes financial markets distortions or mayhem during the fifth Elliott wave.
Be Aware Of The Dangerous Traders And The Activities Of The Dangerous Traders
This is not to insult those types of traders but warn others.
What is essentially known as dangerous traders are those financial market players who intentionally seek
to ruin others for their own benefit. Their first motive is to take others out of their trades, or force them to close their positions. And they do so by targeting their stop losses. Though, this is not illegal, it smell really bad.
Indeed, the dangerous traders usually make substantial amount of profit during the fifth Elliott wave.
For example, before the start of the corrective phase at the end of the fifth Elliott wave, the dangerous traders
will come in, and blow out the stop losses of those who eagerly bet that the price will reverse. That behavior quite often
will propel the price to a new high (unnecessarily) before the reverse will start. Or they will take out the eager bullish traders (that were theoretically correct) at the end of the bearish fifth Elliott wave. This time, the price will decline one more time before the overdue correction starts with vengeance.
Please understand that, the phenomenon that we are discussing here has nothing to do with the normal fifth Elliott wave extensions. Yes, the fifth Elliott can extend beyond the forecast price target when the market environment supports it.
An Elliott trader who constantly ignore the Elliott wave validation or the higher degree Elliott waves count can face nasty
surprises during the fifth Elliott wave. He or she should not blame the dangerous traders. All in all, just remember what
Mr Warren Buffet has said: the first rule is not to lose, and the second rule is not to forget the first rule.
Be agile, alert and smart when trading the fifth Elliott wave, and avoid common fifth Elliott wave trading mistakes.
Should I say fight like a donkey during the fifth wave?
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