Stocks & Commodities V. 24:9 (42-44): Trading Wave 3 by Mircea Dologa, MD
Trading wave 3 could prove to be the most profitable of all waves in Elliott wave analysis. Heres an example.
In my previous two articles, I discussed various techniques you could apply to trading while a wave 3 was in process. In this, the third and final part of the series, I will walk you through a trade so you can see how to utilize everything I discussed in the first two parts.
1. Be alert to the possibility of an extended W3 trade
Identify the profitable low entry.
Price should be near the close of the previous day.
Price should gap down, opening below the close,
then return above the close and fill the gap from the low of the day/morning, or vice versa. This is known as the oops phenomenon.
Price gaps down, consolidates for several bars, then
fills the gap from the low of the morning/day. Again, you have the oops phenomenon.
Follow the price movement from downtrend to uptrend.
Once a low is formed, wait for an upswing in wave
1/A and its retracement of wave 2/B (38.2 50%). After the retracement, you can set up for the wave 3/C ride.
Be aware that a low may not necessarily be the starting point for wave 1, but rather the end of wave B of an ABC correction. Wave C will follow, taking the form of a terminal-ascending triangle. A similar situation might take place when an impulse pattern has a wave 5 failure. This will be a classic doublebottom formation.
Be aware of the formation of w1 of a future W3. It can coincide with the entry (as is the case in the example). The length of the move will give the tone:
o Five bars for a swing
o 13 bars for an average trend, and
o 2134 bars for an extended wave.