This Elliot Wave Strategy Will Make You Money

If you want to trade the Elliott Wave theory, then you should learn the concept of corrective and impulsive waves which, because of its simplicity, can be very beneficial in your trading efforts. These two wave types create the market structure and, if you are able to tell the difference between the two, it allows you to see high probability and low probability trades.

The impulsive wave is what allows the trends to exist. It exists as a sustained move in a single direction with the majority of the price bars also moving in the same direction.

The correction is the smaller move. This takes place in the opposite direction of the aforementioned impulse.

An impulse highlights the direction of existing momentum. The impulses are responsible for creating trends, which means you want to enter on a corrective wave and the ride an impulsive wave. Every trend is made up of several impulse waves and just a few corrections.

The prices move in a structured manner. In some cases, when the structure is unclear, it helps to make the switch to a longer period of time. This allows you to see if the currency pair is within a larger, more complex correction pattern, which is the reason the structure isn’t very clear in the time frame you were looking at. You should trade in the same direction as the impulses until there is an obvious reason not to.

Some of the reasons you should avoid trading in the direction of the seen impulses include:

If the impulses are becoming smaller, which indicates a reduced momentum and the possibility of reversal.
If an impulse in the opposite direction takes place, which means you should begin looking for trades that are in the direction of the new impulse.

This doesn’t always mean you are trading at all times. You don’t want to trade every time a price swing occurs. If the price structure isn’t clear, then don’t make a move until it is. The wave structure takes place on each time frame, which means impulse waves that are higher on a chart over a minute may be a corrective wave against a downtrend on a 10 or 15 minute chart.

Don’t let this scare you away from making a trade on your time frame, but try to keep some perspective on where you plant to take trades, related to the trends and the corrections that are seen in other periods of time.

Use Your Risk/Reward Ratio to Be More Profitable

An extremely successful way to determine exit points is to look at the risk/reward ratio on a trade. Applying the risk/reward ratio provides a pre-set and well calibrated exit points. If the trade doesn’t offer a favorable risk/reward, then the trade should be avoided, which helps to eliminate any low-quality trades from being taken.

If the target is reached on a trade, then the position will be closed, and the target priced according to the strategy in place. If the stop loss is reached, then the manageable loss will be accepted, and the trade will be closed before it has the opportunity to become a larger loss. With this, there isn’t any confusion regarding what to do, an exit has been planned for the predetermined exit points, regardless of if it is unprofitable or profitable.

If the trend is up during a trade, then buying during a pullback is recommended. In some cases, waiting for the price to consolidate for several bars or candlesticks, and then buying when the price exceeds the high of consolidation is best. The difference between entry and stop loss is significant enough to see, making it possible to know what to do, and when.

In theory, the risk/reward model is both effective and simple. The real challenge occurs when a person tries to make it work altogether. It doesn’t really matter how good the reward:risk is if the price doesn’t ever make it to the profit target. A quality target, that has a favorable risk/reward will also require a quality entry technique. The stop loss and entry will determine the risk portion of the equation, so the lower the risk is, then the easier it will be to have a more favorable risk/reward scenario. Note that the loss shouldn’t be so small that the stop loss is triggered unnecessarily.

While this may sound confusing, it is easier to understand with a real-world scenario. Assume that you are making a swing trade and purchase a currency pair with a profit target of 60 pips. Then, a reasonable the stop loss is set at 25-30 pips. In this case, only 25-30 pips just above or below your support or resistance levels, will give you a 2 to 1 reward to risk as a realistic expectation.

The actual calculation of the risk/reward ratio is contingent on the currency pair that is being traded and, due to the many pre-existing variables in the calculation of the pip value for a trade, it is easier explained with stocks to use a fixed value. If you enter a trade for a stock that is priced at $50 USD, your target is $55, and your stop loss is set at $1, the stock will only have to move by 10 percent to reach the $55 mark, or two percent to reach the stop loss, which creates a 5:1 reward:risk.

Depending on market conditions and the economic calendar, there are quite a few currency pair that will move by 10 percent in just a week or two. I would never set a trade with a 1/1 risk/reward ration and would always go for a 2:1 or a 3:1 reward:risk. This means a bigger move is needed to achieve the target, but makes the risk worth entering the trade.

To be successful, a trader have to find a setup that helps to produce a high risk/reward ratio. However, it is necessary to have a relatively conservative price to produce the desired ratios.

How to Integrate the Economic Calendar in Your Trades

By learning about Forex daily statistics, you will be able to better manage your risk as a trader and understand how the various currencies are related. You can also learn how the different Forex pairs move over different time frames.

The Economic Calendar
As a trader, you need to remain aware of major economic announcements. If you are day trading, close all of your positions before a new announcement has been scheduled. Only start trading once again after the news is released.

If you are swing trading, make sure you are aware of any major economic news that may be announced. If the stop loss you have is extremely close to the price prior to a news announcement, you may want to consider closing the position because the announcement may result significant dumps/jumps possible, making a stop loss ineffective.

Current Interest Rates
Knowing the current interest rates in several zones can be beneficial if you are taking a longer-term position that is going to be subject to rollover every night. Rollover occurs when you are credited or debited the interest rate difference of the two currencies that are present in a Forex pair.

Forex Correlation Statistics
These let you know how a currency pair relates to the way another one moves. For example, you may have one pair that moves in a near identical manner to another one. In this situation, you should pick the one you like the best and then trade it. Taking the full position size for both of these currencies is going to double your reward or risk, since if you lose or win one, you are likely going to have the same results in the other.

Forex Volatility Statistics
These show how much a pair is moving – on average – over a certain period of time. This can help you assess how long it may take the price to reach a certain price target and may aid in setting the stop loss and target levels.

Pip Calculator
This shows the amount a pip is worth based on the pair you are trading. Every currency is going to be worth a different amount relative to another currency. The amount of a profit/loss is then generated by each pip of movement that is set by the currency pair that you are currently trading. The pip value is also impacted by the currency that your account is currently in.

By always having an awareness of all these statistics, you minimize taking unnecessary risks with your trades, thus increasing your chances for profits.