Nice Elliot Wave on SPY

Today's action provided several opportunities for profit, but more importantly a clean Elliot Wave pattern formed throughout the day. I like Elliot Wave patterns because they provide several important areas where traders can find an edge.

Understanding Elliot Wave patterns intra-day has helped me become a much more patient trader because they provide good entries, specific stop-loss areas, and logical targets. Take a look at the chart at the left (you can blow it up by clicking on it). The chart was captured about 30 minutes before the market closed.

You can see how the entire day unfolded into a "story" with predictive value--taking what most people see as random price movements and creating a sort of "crystal ball" that gives clues as to what will happen next.

I used to jump in on any pullback to a moving average. Now I try to wait for an ABC pullback to complete before I take a trade. Today, we got a pullback after a 3rd Elliot Wave (big number "3"). I wanted to take a trade as soon as price moved back to the 20 EMA. You'll notice that price bounced of the 20 and began heading upward. But I held off because I was expecting a larger wave 4 to form and I new that wave for usually created an ABC pattern.

The ABC corrective pattern did indeed form. If I had taken the trade too early, I probably would have stopped out--even with a stop comfortably below the 20EMA. Instead, the ABC pattern completed with a "hammer" candle forming off a bounce on the 50EMA. This provided a terrific trade with edge. A stop placed below the 50EMA with a target of the top of wave 3 is what Elliot Wave would suggest as a "wave 5" trade with a 2 to 1 risk/reward ratio.

You'll notice when that trade achieved its target that price continued to move up quickly as the sellers who were shorting ended up buying back their shares. I held my trade as their stops were triggered creating additional gains for the trade.

Using Fibonacci on my final trade

I wanted to point out how I used Fibonacci numbers to make my final trade today. Initially I was playing for an Elliott Wave pattern as price plummeted and then violently retraced. However, I noticed that price pretty much stopped at Fibonacci's 50% retracement level. This gave me a concrete area to place my stop once I was in the trade which I took as price hovered around that 50% level.

I placed my stop just beyond the 61.8% level because I knew that if the price broke out from there, the edge on this trade had disappeared. After placing my trade I used a tool in Tradestation to determine my target for the trade called the Fibonacci Price Extension.
This is capture of my actual trade at the end of the day including the Fibonacci Price Extension. I plotted the extension from the beginning of the swing down and then up into the swing high--or the "flag". Tradestation plotted the "extension" of the price from that point giving me Fibonacci targets for my trade.

I expected a larger move than actually happened. But when price stopped right on the 61.8% extension twice, I knew it was time to take my profits and run. Price hung out there for one more bar before heading up the rest of the day.

Normally, my target for a "flag" like that is the 100% extension. But when you see price fail to break levels above, it might be time to take your profits and run.

Elliott Wave provides a few trades

I was anticipating that there woudn't be much trading opportunity today, but we got several decent trades throughout the day. I only capitalized on my third trade after making silly mistakes on my first two.

The down move around 11:00am should have clued us in that an Elliott Wave was forming. The consolidation (blue dotted lines) provided a perfect place to take advantage of the 3rd wave. I missed this trade because I wimped out after the breakout. I just watched if fall as I wished I had moved more quickly.

The end of wave 4 provided another perfect doji setup for the 5th wave drop. I got into this trade late, and then held on after price made new lows hoping for lower prices. I stopped out at break-even as price came back and took out my stop.

The "abc" pattern after wave 5 provided a few other trades. I took advantage of one of those to book a decent profit for the day.

As I've made the transition from finding "setups" to understanding market "concepts" I've found more opportunities throughout the day. "Concept" trading has also allowed me to vary my position size based on factors "lining up" and providing opportunities with higher chances of success.

Trend Day with Elliot Wave

Things are finally starting to click for me again. I've made my target for May this week. It helped that there were 3 trend days this week! Usually you can expect 3 or less trend days in a month, so it is best to take advantage of them when they show up.

I took advantage of the trend day Monday. We got another one on Wednesday, but I was so biased toward the bearish side that I refused to acknowledge the day until it was over. Today (so far) we've got another bullish trend day going.

I was bearish after the gap began to fill extremely aggressively after the morning "pop" I even went short on what I thought was a bearish flag pattern developing. A few minutes later and I was stopped out.

I've had a lot of trouble with my biases messing up my trading. I've got to learn that the market could care less about what I think it should do. it does whatever it wants to regardless of what everybody thinks it will do. I've stopped listening to news radio while trading because I've noticed that news reports influence my ability to stay focused on what the market is doing as opposed to what I think it will do.

I used to start preparing for the market an hour before the open hoping to glean some sort of nugget of information that I could use to make better decisions. I've noticed that my trading has improved dramatically since I've started turning on my computer and trading software just 10 minutes before the market opens.

I've also been trying to recognize trend days earlier, and that stop out was a wake up call that today was favoring one. I took a trade after the 2nd wave of an Elliot Wave pattern completed (right at the number 2). I had no clue that an Elliot Wave was forming, I was just anticipating a trend day trade.

I sold when price made a new high, and watched as the price continued on about 2 times higher after I sold. That should have clued me in that wave 3 was in progress. I missed two trades (from a to b in wave 4) and wave 5. I tried to get in as price touched the 20 period moving average, but I was too slow calculating everything and price rocketed to new highs and left me behind. Dang it.

I made another "trend day" trade as price consolidated around the 20. It was a hard trade to take because the stock chat rooms that I read were all saying that the rally was done and that we were headed lower and hard. I'm learning that the only thing that matters is what the market is telling us in real time.