Choosing the Best Waves to Trade

Video Transcription:

Hello, traders. Welcome to the Elliott Wave Theory Course at the fourth module, Guidelines of the Elliott sequence. In this lesson, we are going to learn about the personality of each wave but in the corrective ABC cycle after the 5-wave impulse. During the first wave of the corrective ABC, investors believe that this is just a pullback correction for a break to new highs. This is why it’s important for you to understand the psychology behind each wave because you will understand the psychology behind each cycle. We are talking about the first wave or wave A of the ABC.

Okay, we just made a top after the final approach. I’m sorry, after the final advance and now we are moving down. Now, investor will think that this is just a corrective move for a break to new highs, and buyers will jump in even though the bullish cycle has finished at the end of wave 5. You and I know this, but most of the investors out there are very mediocre, and they don’t realize that the bullish cycle has ended. Wave B is the play for suckers, the bull trend. Here is where mediocre investors get burned trying to buy the dip. This is what we’re talking about, okay? The bullish cycle ended at the top of the wave or the fifth wave of the 5-wave impulse pattern that we just concluded, and now we are in wave A of the ABC corrective move.

Wave Personality

Now, players are going to start to buy the dip even though wave A is still in motion. Market is going down, and we don’t see a move to the upside, so everybody is just buying and buying because they think it’s just a dip, and then we are going to break to new highs.

Then comes B wave. The B wave is the move to the upside. Now, everybody is thinking, in the market we were right. The market bounced and it’s going up and they start to buy more, when the wave B starts. But there’s a saying in the investment world that’s called, “Even dead cats bounce.” This means that even in very,very bearish markets you will get bounces to the upside. This doesn’t mean that we are going to make new highs or we are going to break with the down structure. This means that we are just correcting to the upside because of market psychology. This is wave B.

Then the wave C, drives the bear market and they are devastating and erase all previous gains in the final events. Remember that the final events is wave 5 of the 5-wave impulse pattern. And even though in the stock market the ABC is still just a corrective move, in a much higher degree it can lead to an important bear market where bulls will be trapped over and over if they don’t understanding the psychology behind each cycle.

Now, when I’m talking about a higher degree here, I’m talking about maybe the weekly or the monthly charge. Let’s imagine that you are sitting in front of your computer and you will see the S&P 500 just going down and down four-hundredths, 4/10 of points or you see the Dow going down four-hundredths of points.

Now, in the 4-hour chart and the 1-hour chart, you start your wave count and you realize that you are in an ABC corrective move, okay. But if you go higher on the daily, weekly or even monthly chart, you might notice that you are in fact just starting wave A of a higher degree ABC but that will bring the market down to the high and erase the gains from the higher degree wave 5.

Wave personality diagram

Now, let’s go through this diagram to understand what we just went through. So here, right here we made the top at the end of wave 5. On large degrees, prosperity and peace appears guaranteed forever. Arrogant complacency reigns. Intermediate degree, economic improvement, good feeling, and minor degree, often accompanied with good news.

This means that everybody is feeling like a rock star because, well they might have eventually ridden wave 5, so everybody is very happy with their trading and very happy with their profits. But remember, the market has been overvalued at the end of wave 5. Then we have a technical breakdown. The trend line is broken. Remember that the trend line that supports the one, two, three, four, five pattern breaks, and this is viewed as a buying opportunity, like we discussed before.

Then this is the worst of the bear market. Strength, breadth, prices declined relentlessly. Fundamentals ultimately collapse in response. We arrive to the end of wave A. Then comes the buying pressure. Narrow, emotional advance, technically weak, selective, results in non-confirmations. The fundamentals don’t go with the actual advance in the market and as you can see, we don’t make a higher high. I mean, if we would have made a higher high just like here, we would have been maybe in a bull market again, but we are not. And then comes the selling pressure and the devastating selling pressure of wave C.

So this is basically what lies behind the ABC corrective pattern and this is why we are going to always try to ride this wave C to the bottom, and not try to buy these markets when we know for sure that we are in a bear territory.

Adam

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Adam is an experienced financial trader who writes about Forex trading, binary options, technical analysis and more.

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