to play.In trading or investing terms, capital exposure is theprotective stop-loss amount. What does it cost to findout if you made a profitable decision or not?Consistency: Steadtfast adherence to the stone principles, course,etc. A trader or investor must adhere to his or hertrading plan consistently. Without the quality ofconsistency of action, success is unobtainable.Plan:
A scheme or method of acting, proceeding, etc..developed in advance. "If you fail to plan, plan tofail," Any endeavor which does not include a definedplan will not succeed. No one, particular plan willensure success. No one plan will include rules orguidelines that will respond successfully to everypossible, contingent future activity. But, every planmust at least provide the guidelines of how to proceedin all circumstances.
Trade: Relatively short-term speculation.Invest: Relatively long-term speculation.Bozo: Someone who does not take the above definitionsseriously. A Bozo may or may not have red hair andbad taste in clothes. There are no Bozos who aresuccessful traders or investors.Knowing the above definitions and their meaning to us as traders andinvestors is critical to the success in the business of trading and investing.Their critical nature requires more comment and elaboration. The following discussion describes dements necessary for successful trading andinvesting that are far more essential to success than any trading techniques. On the next page is the real "Holy Grail" of trading and investing.
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Dynamic Trading - Chapter 2
Speculation ...is the self-adjustment of society to the probable.Oliver Wendell Holmes
Probability Is A Key Concept Successful Trader and InvestorsUnderstandIf there is a key word associated with trading and investing, it must beprobability. All consistently successful investors and traders know thatevery trading and investing decision only has a probability of success,never a certainty. Losses are inevitable and are just as much a part of asuccessful trading plan as profits. If a trader has a successful trading plan,he or she should have no more emotional response to a loss than to a win.Each will be inevitable. While it may be difficult to maintain a completelynon-emotional relationship to trading and investing, an understandingthat trading is a business of probabilities will go a long way towardsdeveloping a stable attitude toward the business.All successful traders have a defined, written trading plan. The tradingplan can lake many forms. At the very least, it will provide the minimumguidelines that must be satisfied before a trade will be considered. It maybe as complex as a long set of very restrictive rules that must be satisfiedbefore a trade is considered. Each has its strengths and weaknesses.Neither method, whether guidelines or rules will ensure success, but thelack of either will ensure failure. There will be much more on developinga trading plan latter in the book.A trader who does not consistently abide by his or her trading plan isdoomed to failure. Why have a plan and not follow it? Each guideline andrule must be included with reason and purpose. All successful traders andinvestors consistently follow their trading plan and know that if theyviolate their trading plan it will always be costly in the long run.The above discussion is as important and maybe more so than learningany method of technical analysis or trading strategies. Even a trading planthat included analytical procedures and trading strategies that were 100%accurate, in other words, would indeed predict the exact outcome of thecurrent position of the market 100% of the time, would not result in profitsif the trader or investor implementing the plan did not know and act inaccordance with the qualities discussed above,
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Getting Started With Dynamic Trading
Dynamic Ratios and CountsThe foundational principle of dynamic time and price analysis of thefinancial markets is the proportional relationship of all market swings toeach other. W. D. Gann was certainly the first to demonstrate and teachthis fact as early as his first published material in the early 1900s. Upuntil Robert Pretcher revived and popularized the work of R. N. Elliott,most ratio analysis was limited to static divisions for price retracement.By static, I mean the even divisions such as thirds and fourths. Pretcher'srevival of Elliott's work also made the trading public aware of the socalled Fibonacci ratios based on 1,618 which are much more relevant thanstatic ratios to market activity.In a series of private seminars taught in the early to late eighties basedon the work of W. D. Gann and even more obscure market analysts fromthe first half of the century, Dr. Jerald Bauming taught about many of theother dynamic ratios based on dynamic geometry processes that are alsofound in the financial markets. Many of these ratios are based on squareroots and geometric diagonals. While these other number and ratio seriescan be an important addition to the tools of the analyst, they are moreapplicable to advanced study.I have only included the Fibonacci ratios and counts plus just a fewothers with this work because they are by far the most prevalent in timeand price studies. More importantly, they are all that are necessary tomake consistently accurate analysis and projections. Once these methodsbecome second-nature, the student may want to expand his or herknowledge of market geometry and ratio through more advanced study.Fibonacci Ratios and CountsAs far as we know, R. N. Elliott was the First to apply what have becomeknown as the Fibonacci ratios and numher counts to the financial markets.It is a dis-service to the ancient philosophers, particularly Pythagoras, tocall them Fibonacci ratios. The proper name for the root ratio, 13618, is theGolden Mean or Divine Proportion. This proportion was part of the fundamental Leaching of the great Greek philosopher, Pythagoras, manycenturies before the Italian Fibonacci came on the scene.Many books on technical analysis, particularly those on Elliott Waveanalysis, have described how the Fib ratios and counts are derived andfound thoughout the natural world and have been used in all of the greatestart and architecture thoughout history. I´m not even going to touch on thesubject here because the background is not directly relevant to practicalapplication. All that we need to know are which ratios and counts areimportant and how to apply them to technical analysis. So, I will just fist
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Dynamic Trading - Chapter 2
the ratios and counts that are relevant to our work, if the student wishes todelve deeper into the greater significance and history of these ratios andnumbers, the bibliography provides plenty of sources.
Fib Ratios,236.382.50*.50'.618.618.786*1.00*1.272*1.272*1.6181.6182,000*2.6184.236
Fib Number Series358131321345589144144233377
The series continues bymultiplying the previousratio by 1.618. 1.618.
The series continues byadding the two most recentnumbers to come up withthe next number.
Ratios with an asterisk (*) are not directly a part of the Fib ratio seriesbut are related and important for time and price technical analysis work.Two ratios included above that you may not be familiar with are:0.786 = square root of .6181.272 = square root of 1,618The Dynamic Time and Price Analysis chapters will describe thespecial situations where each of these ratios apply.
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Getting Started With Dynamic Trading
Waves or Swings of Similar DegreeAt important market turning points, prior waves of similar degree willrelate in time and price proportion at the turning point. Similar degreewaves are those waves that are to some extent similar in time and pricewithin the context of the trend. For instance, intermediate term wavesare generally 30-90 days in time and 5%-l0% change in price for mostmarkets. If you were to look at a weekly chart, intermediate degreewaves would be the obvious swings in the market.Daily charts reveal the lesser degree or minor degree waves thatunfold within the intermediate degree waves. In other words, the intermediate degree waves arc sub-divided into the minor degree waves.The time, price and pattern projections of the lesser degree waves shouldcoincide with and confirm those of the larger degree.Many of the examples throughout the book will demonstrate how thesmaller degree wave projections will fine tune the time, price and patternanalysis of the larger degree projections. This aspect of the analysis shouldbe very familiar to Elliott Wave traders who look at ever smaller degreesof wave counts to understand the position of the market.The terms wave and swing will be used interchangeably throughoutthis book,
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Dynamic Trading - Chapter 2
T-Bond: 10% or Greater SwingsThe chart below is a daily close-only chart from the July 1984 low with a10%+ swing file overlaid. In other words, each swing made a price changeof at least 10% before it was included. As you can see, the 10% or greaterswings represented major trends and counter-trends in this period.
The major degree swings in any particular market may not necessarilybe represented by 10% or greater price swings. A greater or lesser percentage change may be more suitable for other markets. The above chart andthe one on the following page are included to illustrate how dynamictraders view different degrees of change in each market.The following page shows a 5% or greater swing chart for the sameperiod,
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Getting Started With Dynamic Trading
T-Bonds: 5 % or Greater SwingsThe chart below is for the same period as the chart on the previous page.This chart includes the 10% or greater swings shown on the previous chartas well as the lesser degree 5% or greater swings. The daily bars are notshown to avoid overcrowding the chart.
Dynamic Trading analysis often references the position of one degreeof market activity within the context of the larger and smaller degrees.
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Chapter 3Pattern and Practical Elliott Wave AnalysisPractically all developments which result from our socialeconomic processes follow a law that causes them to repealthemselves in similar and constantly recurring series ofwaves or impulses of definite number and pattern.R. N. Elliott
In the Pattern and Practical Elliott WaveInWave AnalysisAnalysischapter youyouchapter*• LearnLearn practicalpractical pattern and Elliott Wave analysis inorder to identify specific set-ups that have a highprobability outcome as well as the specific marketactivity that will invalidate the anticipated outcome.•* LearnLearn thethe relationship between pattern and trendposition.*• LearnLearn howhow toto use pattern to validate or invalidate theworking assumption of the position of the market.• Learn howbow loto use pattern to help determine themaximum stop-loss level.
• Learn which patterns are the most consistently reliableacross a wide range of markets to identify the positionof the market.• Learn the strengths and weaknesses of Elliott waveanalysis,• Learn practical strategies to implement Elliott waveanalysis into the trading plan.
Pattern and Practical Elliott Wave Analysis
This Chapter Teaches Practical Elliott Wave AnalysisTwo of the important benefits of practical Elliott Wave analysis is to beable to quickly determine if the market position is trend or counter-trendand the pattern position that signals [he termination of each of these trendpositions.
Gold terminated a strong, bull rally Aug. 2, 1993. Elliott wave analysissignaled days in advance that the bull move was nearing completion. Isthis an after-the-fact example? Absolutely not. The author's DynamicTrader Analysis Report identified gold's position well in advance. Thischapter will teach you how to quickly identify the position of any marketmost of the time by practical Elliott wave analysis. I say "most of thetime" because you will also learn when the Elliott wave pattern positionis not providing adequate information for a trading decision.How valuable is it to you to be able to identify if the current positionof a market is a trend or counter-trend? This is critical information thatwill help determine what trading strategies to implement.
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Dynamic Trading - Chapter 3
Dynamic Traders Make Their Own DecisionsDo you remember the sharp decline made by the S&P in July 1996? Doyou remember how many well publicized market "gurus" and analysisclaimed this was just the beginning of the "long over-due" bear market?Practical Elliott wave analysts understood the July decline was thecompletion of a correction (probably wave-four) which should be immediately followed by the continuation of the bull trend to new highs.
How did it turn out? Up to the time this section of the book wasprepared, the S&P has advanced over 30% from the July 1996 low leavingmany of the gurus and overpaid analysts with egg on their faces and bigdrawdowns in their customer's accounts. Do you see how an understanding of the trend and counter-trend position of a market will provideyou with toe perspective to make high probability trade and investmentdecisions?Dynamic Traders were prepared for the continuation of the bull trendin July 1996. By mastering the simple rules and guidelines of practicalElliott wave analysis and trading strategies, you will understand theposition of a market and not have to rely on the often grossly inaccurateanalysis of the media gurus.It is necessary to first gain a background of pattern analysis of marketposition. Much of the high probability time and price analysis will becontingent on an understanding of the pattern position of the market.
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Pattern and Practical Elliott Wave Analysis
Your first time though this pattern chapter, it may seem morecomplicated than it really is. Don't skip this chapter, but also, don't gethung up on memorizing every detail. By the time you are through withthis chapter, you will have a firm grasp of the practical principles of Elliottwave analysis. The subsequent chapters on Dynamic Price and TimeAnalysis and Putting It All Together will reinforce what you have learnedin this chapter.The summary of Elliott's wave principle in this chapter does notattempt to explain the rationale of Elliott's theory or how it is a reflectionof social or mass psychology. That explanation is available in other publications about Elliott Wave,Most traders are already familiar with the basics of Elliott waveanalysis. Even if you are, do not skip this section. It is important tounderstand the perspective, terminology and notation used in the bookso there will not be confusion later on.There is no practical trading value in knowing all of the complexcorrective variations. The purpose of this training is not to become academic experts of market analysis but recognize and apply analysis andtrading strategies that have practical value for making trading decisions.We'll let the academics and non-trading analysts argue over the properinterpretation of market structure, while we will concentrate on whathelps us to make trading and investing profits.The focus of our use of wave analysis will be the same as it is withany other analysis method. What practical information is the marketproviding us that helps put the probabilities in our favor for successfultrades and investments? The chart pattern provides us with an importantpiece of information regarding a market, which is; What is the most likelycurrent position of the market relative to the trend, and what marketactivity will confirm or invalidate the assumed position?If we know the most likely current position of a market relative to thetrend, we know what the most likely future position will be. Note that Ihave said, most likely. Always keep in mind that we are dealing withprobabilities. We can never know with certainly what is the current position and what will be the future position. The objective of pattern analysis,just as with time and price analysis, is to put the probabilities on our side.R. N. Elliott has provided traders and investors with the most objectivemethodology of determining the position of a market by what has becomeknown as the Elliott Wave Principle. This pattern chapter will onlyconsider Elliott's Wave Principle as it is the moat objective descriptionof the position of a market related to pattern. However, contrary to theopinion of some Elliott wave proponents. Elliott's Wave Principle will notalways provide a confident description of the market position. However,
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Dynamic Trading - Chapter 3
the Elliott Wave Principle will almost always provide a description of themarket position that will tell us with confidence if the market is in trendor counter-trend and the degree of the trend or counter-trend Thisinformation alone is invaluable to the trader or investor.First we will look at a summary of the Elliott wave principle, men wewill look at it's strengths and weakness followed by how we can put it topractical trading application.Essentially, Elliott's Wave Principle is a catalogue of defined chartpatterns. When recognized by the analyst, these patterns should not onlyindicate what the current position of the market is relative to trend orcounter-trend, but imply what the most probable direction of the marketshould be if the analyst has correctly identified the current pattern. In otherwords, each pattern has implications regarding the position of the marketand the most likely outcome of the current position.Elliott Wave BasksThe basis of Elliott's Wave Principle is that most trends unfoldin five wavesiafivewaves inin thethe directiondirection ofof thethe trend and three waves inthe direction counter to the main trend.trend. It'sIt's that simple,Markets usually unfold in three's and five's. Five wavepatterns are impulsive structures. Three wave patterns orecorrective structures.There are certain rules and guidelines that help to identify the wavestructure. If the activity of all markets could be easily identified at alltimes with one of Elliott's wave patterns, trading would be a simpleexercise of entering and exiting a market at the completion of the patternthai would signal a trend reversal. Needless to say, it does not work outthis easily for two obvious and important reasons:1. Markets only exhibit a useful Elliott wave pattern about 50% of thetime. Traders or investors who try to apply an Elliott wave count toeach market at all times and under all conditions are usually forcing awave count just for the sake of exhibiting a wave count. When this isthe case, the Elliott wave pattern information is not only useless, butmisleading and can prove very costly. Market analysts who limit theirentire technical approach to Elliott wave analysis are notorious fordoing this. They try to prove something that does not exist. Practicaltraders and investors recognize when Elliott wave analysis is applicable to a market condition and when it is not.2. At titles, particularly with complex, corrective patterns, there issimply little clue as to the position of the market within the context
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Pattern and Practical Elliott Wave Analysis
of the pattern of the larger degree trend. All indications may be that amarket is in a correction, but once the market gets beyond a simpleABC correction there usually is not a confident, specific patterninterpretation. When this is the case, the analyst should not try to forcea complex count just for the sake of trying to identify something that isnot reliably identifiable.
Don't Become A Trading JunkieIf a market is not providing the information necessary to makea confident decision that provides an acceptable level of capitalexposure, that market must simply be ignored for the timebeing. There will be opportunities within the context of thetrading plan at another time or in another market.
If we are able to identify a confident Elliott wave count of the marketposition, that particular count will also provide us with the market activitythat will invalidate the wave count. This is extremely critical. Jn effect weare talking about & pattern stop-loss. There will be more about this as welook at each individual pattern.Now, let's begin our study of Elliott's wave patterns by studyingthe general characteristics of impulse and corrective waves, the rules andguidelines associated with Elliotts Wave Principle and how the mostreliable wave patterns provide us with specific price targets for the confirmation and termination of trend,Wave Labeling and Notation Conventions Used In This BookEach wave may be sub-divided into another wave patten] of lesser degree.Each wave is also a part of a larger degree wave. Generally, we will onlybe looking at three degrees of trend: minor, intermediate and major. WhileR. N. Elliott described many degrees of waves from the super-cycle wavethat lasted decades to sub-minuette waves that may only last minutes,these extreme waves are of little practical value to traders. It frequentlytakes a lot of imagination and a three martini lunch to come up with wavecounts on very long-term charts or very short-term intraday charts. If youcan clearly identify two or three degrees of wave structure, you will havethe critical Information needed to make a trading decision.The charts on the following page show how waves may be labeled bythree degrees: major, intermediate and minor. The intermediate degreewaves are sub-divisions of the major degree waves while the minor degreewaves are hub-divisions of Ihe intermediate degree waves.
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Dynamic Trading - Chapter 3
Three Degrees of Wave Sub-DivisionsMajor Degree Waves
Intermediate Degree WavesSub-divisions of major degree waves.
Minor Degree WavesSub-divisions of intermediate degree waves
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Pattern and Practical Elliott Wave Analysis
Three Degrees Of WaveThe swing chart below shows three degrees of waves labeled. Only thelast wave of the series shows all the notations for all degrees.
The entire sequence shown above is a wave one and two of majordegree (waves (1) and (2)}. A smaller degree sequence will alwayscomplete at the end of a larger degree wave. When notating more thanone wave together, begin with the smallest wave and work up to thelargest For example, 5:3:(1) is the end of minor degree wave 5 ofintermediate degree wave 3 of major degree wave (1).Major degree waves usually last from several months to several yearsand are obvious on a monthly or weekly chart. Intermediate degree wavesusually last from several weeks to several months and are obvious on alonger term daily or weekly than. Minor waves usually last from a fewdays to a tew weeks and are revealed on a daily chart. There is no definedtime period for each of these degrees of waves. A grain market may havea major degree bull and bear market every three to five years because ofpanic weather cycles while a financial market's major cycle may lastmuch longer as the recent major-degree, stock bull-market which haslasted well over a decade demonstrates.My terminology and labeling conventions may be a bit different fromElliott's and what other Elliott wave analysts use today. Don't be hung upon labels and terms. Leave that for the academics to argue over. My objective is to keep things simple so we will be able to easily note what is thewave structure of the market. The most important factor to keep in mind isthat you should be concerned with one degree of wave larger and onedegree of wave smaller than the degree you intend to trade.
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Dynamic Trading - Chapter 3
Ideally, the market structure will dearly reveal three degrees. This isnot always the case. Do not try to force an Elliott Wave count on a marketwhen none clearly exists! Academics and advisors do this all of the timeand usually end up tripping over their multitude of "alternate" counts. It isjust as important to recognize and admit to what is not clearly revealed asto recognize what is obvious. True knowledge is recognizing how little itis you know. The wise person does not worry about their ignorance.The wave structure illustrations on the following pages are idealizedswing charts. The first objective is to become thoroughly familiar withthe rules and guidelines for wave structure before applying them to actualprice charts. This is best taught with the idealized swing charts- Latterexamples will use actual price charts.Some of the illustrations in the time and price chapters will assumeyou have a working knowledge of wave structure and the label notationsused in this chapter. Don't skip the rest of this chapter even if you arealready familiar with Elliott Wave analysis.
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Pattern and Practical Elliott Wave Analysis
A Summary Of The Elliott Wave PrincipleImpulse Waves - General Description1. Impulse waves unfold in a pattern of five waves. A five wave pattern isalways a pare of a larger degree trend,2. Waves 1, 3 and 5 within a five wave pattern arc themselves impulsewaves of lesser degree and should each sub-divided into a five wavepattern.3, Once a five wave pattern completes, the entire sequence should becorrected by a pattern of either three waves (ABC) or one of a seriesof three and five waves known as "complex corrections."4, Corrective waves within a five wave sequence are waves two and four.5. One of the impulsive waves will usually extend or be noticeably longerin price than the other two impulse waves. In the financial markets, theextended wave is usually wave three. In the commodity markets, theextended wave is often wave five.6. The two non-extended waves are frequently close to equality of pricerange.Sub-divisions of Impulse WavesEach impulse wave of the five-wave sequence (waves 1, 3 and 5) shoulditself be subdivided into a five-wave sequence.
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Dynamic Trading - Chapter 3
Elliott Wave "Roles" For An Impulse SequenceThere are just three rales that are considered inviolate according totoday's traditional, Elliott wave analysts. However, Elliott never listedthese as inviolate rules. When describing these situations in his earlierworks, Elliott used the terms "should" and "rarely", not "never". In orderto avoid the criticism that Elliott's pattern analysis was not completelyobjective, I suspect these rules were developed as inviolate long afterElliott had completed his own life-cycle fifth wave,I will describe these rules here, as they are a good guide to keep theanalyst objective as to the position of the market relative to Elliott Waveanalysis- Later in this section, I will illustrate how markets apparentlyhave not read Elliott's works and seem to ignore the rules with someregularity,Elliott Wave "Rules"1. Wave 2 cannot retrace past the beginning of wave 1.2. Wave 3 cannot be the shortest of the three impulse waves (1, 3 and 5)in the five wave sequence.3. Wave 4 cannot overlap or trade into the territory of wave 1.If any of these rules are violated, the wave structure as labeled is incorrect and must be re-evaluated.Impulse Wave "Rules"Waves 1. 3 and 5 are themselves impulse waves of one lesser degree.Waves 2 and 4 are corrective waves.
Wave 2 cannot exceed the beginning of Wave l
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Pattern and Practical Elliott Wave Analysis
The Rules and Guidelines IllustratedThe following illustrations assume that the pivot marked 0 is a changeof trend from where a five-wave, impulse sequence should begin. As amarket unfolds, it will either validate that assumption or provide us withpotential alternate counts if that assumption is invalidated.Wave Two cannot exceed the beginning of Wave One.If the market exceeds the beginning of wave one, the count must be reconsidered. Below, the initial five wave advance from 0 cannot be a wave oneof larger degree because the market has declined below the beginning ofwave one. Possibly, the five wave advance is a wave A of an irregularABC correction. Waves A and C are often five wave structures as wewill see when we discuss corrective waves. Or, 0 is not the completion ofa five wave sequence as we originally suspected.If a market trades below what was assumed to be the beginning ofwave one, we must change our opinion of the position of the market andcan no longer assume a new five-wave trend sequence had begun.Depending on the preceding wave structure, that opinion may now bevery bearish.
Wave 2 cannot exceed the beginning of Wave 1.This five-wave sequence cannot be a wave (1) of larger degree as it has declinedbelow the beginning of wave-1. lt may be an A wave or even the termination of acomplex correction.
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Dynamic Trading - Chapter 3
Wave Three cannot be the shortest of the three Impulse waves 1,3 or 5.
If what we have considered to be a wave three is less than the length ofwave one and wave five then exceeds the length of wave three, the fivewave impulse count is invalidated. Wave three cannot be the shortest ofwaves 1, 3 or 5. If this occurs, more than likely the proper count wouldindicate that wave three is to be extended and the original label of waves3-5 are the sub-waves of a wave three of larger degree as shown below.
Wave 3 cannot be the shortest of the three impulse waves 1,3, or 5.
Incorrect Count: Wave 3 may notbe the shortest impulse wave.
Possible Count
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Pattern and Practical Elliott Wave Analysis
Wave Four cannot trade within the price range of Wave One.If we have labeled a 1-2-3 count and subsequently the market declinesfrom the end of wave 3 into the price range of wave 1, the count must bereconsidered. Either the original wave three and four are waves one andtwo of wave three of larger degree or the market is in a corrective phaseand waves 1 -3 are really ABC of a corrective pattern.
Wave 4 cannot trade into the price range of wave 1,
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Dynamic Trading - Chapter 3
The smaller degree patterns confirm the position of the larger degree.As a market unfolds, it will continually confirm or invalidate the suspected count. The assumption below is that the market has made a fivewave advance which is wave one of larger degree. From the wave onehigh, the market declines in a five wave structure. The five wave declineshould not be a completed correction as corrections are usually three wavestructures. The five wave decline could be a wave A of an ABC correctionor the high labeled wave one may have actually completed a larger degreecorrection and the decline is a continuation of the main bear trend.The position of the market preceding what is illustrated below willhelp to determine the alternate pattern positions. For now, all we want tobe able to do is recognize the immediate position of the market.
Wave 5? should not be a completed corrective Wave (2).Corrective waves should not be live- wave sequences.This is possibly a wave A, the first wave of a corrective series.
Trading is applying the knowledge of the greater probabilities ofmarket position derived from the analytical procedures. In the abovecase, there is one important piece of information: more than likely, whatwas labeled as Wave (2) is not a Wave (2). Knowing what a marketprobably is not con be as valuable as knowing what it probably is.
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Pattern and Practical Elliott Wave Analysis
Fifth-Wave-FailuresThe expectation for impulsive waves is that each of the internal impulsivewaves of a five wave sequence (waves 1, 3 and 5) will exceed the extremeof the prior impulsive wave. In other words, in & bull trend the wave threehigh will be higher than the wave one high and the wave five high will behigher than the wave three high. Occasionally, this will not occur in thefifth wave, and the fifth wave will terminate short of the extreme of thethird wave. This is called a fifth-wave-failure.The fifth wave is an impulse wave and should be sub-divided into fivewaves of lesser degree. Rather than try to guess if a fifth-wave-failure willunfold, it is better to monitor the internal structure and price objective ofthe fifth wave itself to determine if it is probable to fail.Fifth-Wave-FailureWave 5 does not exceed the extreme of wave 3,
An early warning that a fifth-wave-failure may unfold is the natureof the wave four. An unusually deep wave four which retraces more than50% of the price range of waves 1-3 or approaches the extreme of waveone will often result in a fifth-wave-failure.Important trading implication of a fifth-wave-fallureA fifth-wave-failure has very bearish implications regarding the subsequent correction. The collection will probably be relatively deeper thanis typically anticipated following a completed wave five.
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Dynamic Trading - Chapter 3
Fifth-Wave-Diagonal-TrianglesA fifth-wave-diagonal-triangle is an exception to the rules. Theimportance of recognizing a fifth-wave-diagonal-triangle is thetrading implication following the completion of the triangle.A diagonal triangle may occur as the fifth wave of a five wavesequence. The impulsive waves 1, 3 and 5 of the larger degree wavefive may divide into "threes" instead of "fives" which of course cancause confusion regarding the count and position of the market if thisshould occur.Wave 4:5 may trade into the range of W.l:5. This is the only exceptionto the non-overlap rule of waves four and one accepted by TraditionalElliott wave analysis.Fifth-wave-diagonal-triangles are infrequent and usually only occur atmarket peaks, not market bottoms.Fifth-Wave- Diagonal-TriangleWaves 1, 3 and 5