It is always a nice feeling if one catches the third Elliott wave. Usually, the price rises or declines at a faster rate and one can get paid multiple times. At the same time, those that are misusing the overbought and oversold stochastic indicator also take quick losses.
I am writing this article because traders have been asking me to write about the third Elliott wave trading. Without keeping you waiting, let get right into it.
Elliott Wave Rules And Observations For 3rd Wave
The third Elliott wave should not be the shortest impulse wave in comparison to both 1st and 5th waves. A normal 3rd wave must reach the 161.8% of the 1st wave. An extended or complex third wave must exceed and break above that 161.8% Fibonacci extensions of the 1st wave.
One can predict the third wave using the internal waves of the first wave. The third wave can be extended like the 1st and 5th waves. The third wave is very often extended, but not always. A healthy third wave must break resistances ahead in a bullish trend and vice versa.
So those are few rules and observations relating to the third wave. Now, that one knows few third wave characteristics, it is time to look at how one can enter the third wave like a technical trader.
How To Enter The Third Wave Like A Technical Trader
The safest place to enter the third wave is above the high of the first wave. I mean break above, retest, and turn around after the common sense trend line is broken. Of course, one must use a top-down trading strategy. I will not dwell on how one should enter a trade like a pro. Let's move on please.
More experienced traders can join the third wave soon after the second wave like a pro. That one can be challenging for the beginners. One should not assume that the second wave will be a clean pull back or rally. It can be messy sometimes, so be patient, and use a different times trading entry. If the signal fails then one must come out right away.
Apart from those two entries, one should not forget to add more positions as the price is validating resistances as new support levels ( break above and retest) in an uptrend. Another place one must look for an new entry is above the 161.8% Fibonacci extensions of the 1st wave.
Note that one must be very defensive if one is trying to enter the third wave above the 138.2% Fibonacci extensions of the first wave. Secure your gains between those two Fibonacci extensions levels.
What I call the bullish cow financial instruments can extend beyond 161.8%, 261.8% Fib levels and reach 314% and 361.8% Fib extensions levels of the first wave.
Things can become a bit exciting when one spots the internal waves of the third wave. In that instance, one can also add new positions above the high of the first internal wave of the third wave itself.
You get the message, and I believe you will keep improving your third wave trading entries. Of course, there are other ways to enter the third wave, but those are the essential ones. Always draw your channels and.apply the market geometry because it can only help.
Setting Price Target In Third Wave
Generally, the first target is 161.8% of the first wave. Another target is 261.8% Fibonacci extensions level, and the greedy one is at 314% Fib level.
Note that the third wave can exceed those targets in few instances so do not be surprised when it reaches the 414% Fibonacci extensions level of the 1st. One can just draw those Fibonacci extensions levels. Please do not try to sell in a bullish third wave or buy in a bearish one. That is a bit risky in my view.
Please if the trend is bullish, and one is just itching to sell, it is a violation of the market patterns. Do not fight the trend because the trend is your friend. Do not fight friends or allies. Right?
Believe it or not, a lot of technical traders have been throwing real bucks or cash through the windows because they love trading against the trend.
That is why one must always use a different times frame technique. The trend is the the setup time frame's trend, not the one on both signal and entry time frames. Alright, I make my point. We will come back to that in another article.
All, I want traders to remember is do not fall into the temptation to sell at those target levels in a bullish third wave.
One can have a clean cut signal to sell in a bullish trend, but one has also the choice to let others take it, and one can refuse to take part in it.
First Wave Structures Help 3rd Wave
If one is a beginner wave trader, please do not feel useful if one can not understand what I am about to discuss because it is an advanced wave trading strategy.
Advanced Elliott wave traders who isolate the internal wave structures of the first Elliott can predict the possible ( not the guaranteed or definite) structure of the third wave. That is about combining the predictive fractal patterns and Elliott wave forecast. Many times, that strategy does help to trade the third wave more precisely.
However, the forecast is only an expectation that the price-action must confirm. Without that Elliott wave confirmation, the forecast will be put on hold ( but not forgotten though). That is all I will say about using the 1st wave fractal structures to help trade the 3rd wave. I will be writing about that topic in the near future. So please stay tuned.
3rd Wave Fundamental Analysis
Please, allow me to say that the bullish third wave can fail if the fundamentals are not robust. Similarly, a bearish third wave will not go anywhere if there are no intrinsic reasons (financials) to justify it.
Really, for a healthy third wave to extend beyond the 161.8% of the 1st wave or reach at least that level, the financials must support it. Check the financials, economic news and perform the Google finance acid test.
To get your attention, I will add that it is always helpful to combine the fundamental analysis with the Elliott wave forecast.
In fact, an Elliott wave trader or investor who refuses to combine both analysis will not go too far. Truly, those wave traders are letting themselves down badly. I am sorry, but there is no better way I can put it to the purest Elliott wave traders.
Moving Averages And Third Wave Trading
After keeping my eyes wide open without blinking for many days and nights, I have found specific moving average crossovers that highlight the start of the internal waves of the motive wave.
As we all know, traders hate moving averages for many reasons. They get whipsawed all over the place. They also hate them because they are too simple or easy.
However, the second indicator to the price is the moving average. In fact, the price is the moving average period one. Moving averages smooth the price-action. Remember the line chart; even though we now mostly use candlestick chart, the line chart still has its place.
Truly, the real reason why most technical traders hate moving averages is because they do not know how to trade them. Alright, I have said it now, so I will stop there.
All I would say is this, a moving average crossover setup must be confirmed by the price-action. After the confirmation, one must use a top-down trading method. Am I talking too much again? I hope not. We will talk about that another day.
The bullish third wave often starts after the moving average twenty-one crosses above moving average thirty-four. The bearish third wave often begins after MA 21 crosses below MA 34. This is the first time I am talking about this in a public place because most traders are now ready to handle it like a professional.
Warning: After that specific crossover, the price-action must confirm it. After a bullish crossover, the price must keep breaking resistances, and turn them into support levels. Otherwise, one will get whipsawed. Right? After the confirmation, use a top-down trading method.
Never forget that the fundamentals or financials are the real engines of a healthy third wave.
In the case of the bearish third wave, look for lower lows and lower highs after the moving averages crossover. The price must continue to break below key support levels and convert them into resistance. Otherwise, one will get whipsawed over all over the place.
The challenge for using MA 21 and MA 34 crossover to find the start of third Elliott wave is to use it effectively. That is another whole topic for another brand new article.
So what can I say to traders at this juncture? Please do not think that with this revelation you will become an expert third Elliott wave trader.
However, one can use that crossover as a stock screening parameter to find financial instruments that are about to start the third wave. So that is an exercise of gathering data. That is also the first step. The next step is to count the waves and see the moving average crossover has done a good job. If not we bin that financial instrument.
So, one will be filtering those financial instruments that one has gathered. Once one has a list, one must validate the wave count by using the corresponding lower and higher times frame. I mean one will do everything else that an expert Elliott wave trader should have done.
For example, if one uses the daily chart for the crossover, one must validate the wave count using both monthly and hourly charts. I may write another article about how to use the MA 21 and MA 34 crossover to trade the third wave like a pro. We will see.
Yes, one may find that specific crossover, but the third wave may never show up. Well if it is not there it is not there, please do not create or force it. I do not want beginners to think that "alright, now my wave analysis is easy and I do not have to learn to count waves anymore". Do not think that way. Personally, I use that crossover on the monthly chart to quick spot stocks that may be at the start of a third wave.
If the SP-500 is in the bullish 5th or corrective phase, that is not the right season for one to be looking for bullish third wave financial instruments unless one is speculatively trading or investing.
That is it. I have said enough about the third wave trading. Obviously, I will be posting other relevant articles in due course to complement this one. If you have any questions or comments, please post them at 24Elliottwaves YouTube channel under any video and I will take care of them in due course.
If one wants to catch the lion share in the financial markets, one must learn to trade the third wave like a pro. It would be nice if one can find a stock that is starting the third wave everyday, but that is not always the case especially on the monthly or higher times frame. However, a speculative Elliott wave trader will find speculative third waves on the lower times frame.
To become a better Elliott wave trader, one must keep working on it non stop because that is the only way one will gain more skills and experience. The question is where do you see yourself in ten years?
I hope this article is helpful. If that is the case, please share and bookmark it. Also, feel free to say nice words about us in Elliott wave trading forums.