How to Trade Waves within Channels

Video Transcription:

Hello, traders. Welcome to the Elliott Wave Theory course, and the third module, Advanced Elliott Wave Analysis. This is the second part of the Channeling Waves lesson, and what we’re going to do is we’re going to jump right into the empty form platform and we are going to put everything we have learned so far in motion.

This is a one-hour chart on the US Dollar/Japanese Yen. And what we are looking here right now is a possible five-wave pattern. We have right here an extreme in the market when we made this low, and then we break with this down structure. Let me just get rid of the ray on this trend line. And as you can see, we break with this structure right after we made this low right here and this extreme in the market.

 

So we are going to label this Wave 1. And why are we going to label this Wave 1? Well, that’s easy. Because we are right here in price action. And we need to start from… Well, if this is in fact a five-wave impulse pattern, we need to start from an extreme in the market. This is the extreme, then we have a break of the previous structure, then we have a sharp corrective move to the downside. And if you notice right here, we have corrected about 76.4%. So we are going to be labeling this low Wave 2.Trading waves in channels

So this is starting to look like a five-wave impulse pattern, right? Because we have one, two, three, four, five waves inside a third wave, which is a long wave which means that this is not the shortest wave, which means that because Wave 2 didn’t retrace more than 100% of Wave 1 and Wave 3 is not going to be the shortest wave of this pattern, this is looking more and more like a five-wave impulse pattern. And we are looking for a long opportunity right here. So we are going to use what we have learned so far, and we are going to try to channel this pattern.

The first thing we’re going to do now that we have Wave 1, Two, and Three, we are going to draw a trend line from the end of Wave 1 until the end of Wave 3. Well, we are going to just draw a parallel line from the end of Wave 2 to make or to draw the bottom of the channel. Now remember that this is not the final channel. Maybe we are going to have to redraw it. We don’t know yet. But remember that we also need to think about alternation. The sharpness of Wave 2 is giving us the idea that Wave 4 is not going to be a sharp correction. It’s going to be a long sideways correction. And we have another point that gives us the idea that this is actually a five-wave impulse pattern. So the thing we’re going to do is we’re going to start looking at price action right here. And what we want to do is we actually want– Let me just get rid of this ray again. What we want to do right here is break with this down structure. We are making lower highs and lower lows. And we broke with the bottom of the channel, but that doesn’t matter, because Wave 4 doesn’t exactly need to end at the bottom of this channel because this is not the final channel.

Waves

So we are going to start looking at price action. You can see that we made another low and then we broke abruptly with this downward structure that we were at. So we are going to be labeling here this low, Wave 4. Now remember that we are looking to trade Wave 5. So we are going to get rid of this channel that we previously draw and now what we are going to draw the bottom of the channel from the end of Wave 2 till the end of Wave 4. And of course we want this channel to ray, and then what we’re going to do is we are going to draw a parallel line from the top of Wave 3.

Now because this wave of Wave 3 is 215 pips, Wave 5 might be 215 pips also. Remember that this is our entry right here. We cannot enter here. Why? Because their channel wasn’t drawn yet and because we didn’t know that this low was actually the end of Wave 4. But when we broke with the corrective structure right here, which was actually a very nice triangle as you can see right here, we have A-B-C-D-E, and then, boom, a break. Then this is our entry with a stop loss all the way down here. Let me put where our stops are going to be. So this is in fact was a very nice Forex pip risk.

So we enter here and we are going to be taking profit at the top of this channel. So what we’re going to do right here is we’re going to see candle by candle where this trade takes us. And as you can see, price hits the top of the channel and it even goes further than the top of the channel. And if you measure from the end of Wave 2 till the end of Wave 3, that’s 220 pips. And from the end of Wave 4 till the end of Wave 5, that’s 260 pips. And what we have here is actually a throw-over. Elliott suggested in his book that sometimes Wave 5 will go above the top of the channel in an ascending structure. But this actually doesn’t matter because our take profit level was all the way up here. So we actually made 140 pips with a risk of 46 pips using this technique and of course using the Elliott Wave Theory by correctly labeling the sub waves inside the structure.

Adam

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