Surfing Your Position With Wave Stops by E. Labunsky and T. Hamilton
When is a good time and place to exit a position?
Whether inspired by Ralph Nelson Elliottís works or by just a casual observation of a price chart, you canít help but notice how prices advance, then pause and correct in a wavelike action. What if you could take that basic price movement on the part of buyers and sellers, supply and demand, and use it to manage your position? That is the basic objective of wave stops, the method I developed to determine a good time and place to exit a position.
Wave stops are unusual because the concept does not rely on price or volatility directly. It is a method to set a stop and exit a position based on the profit drawdown of the position. Price and volatility are taken into account, but in an indirect manner. We assume that most moves will come in a three-wave movement ó that is, a strong move up, followed by a price correction, followed by the next move up, and so forth. It is not necessary to have three waves; more or less is fine. This process also works with down movements.
Letís look at the wave stop rules on a price movement (Figure 1). For this case, letís use a simple long position. Take a position and set an initial profit target. Once the price gets to or above the initial profit target, apply wave stop rules. The rule states that you must monitor the positionís profit. If it corrects more than a fixed value (x%), that signals that a correction is in process. This is wave 1. Continue to monitor the profit drawdown until a second point is hit (y%). This is your exit or sell-stop level.