V. 22:7 (82-84): Elliott Wave Risk And Reward by Tony Beckwith

Elliott Wave Risk And Reward by Tony Beckwith

Establish your exit stop strategy before placing your next trade.

Traders have no business trading if risk/reward analysis is not at the top of their concerns. If a trader has no idea of the potential profit return on any given trade relative to the initial risk of taking the trade at all, his long-term profitability is in question.

Elliott wave (EW) analysis has come in for its fair share of criticism over the years, due at least in part to the inevitable overcomplication by analysts and the fallibility of some of their forecasting. However, by steering clear of these two pitfalls, some of the basic premises of EW analysis can be stripped out and used in a highly consistent risk/reward trade plan.

JUST REWARDS

To evaluate the reward part of the equation, Elliott wave analysis can help by pointing to where the reward is likely to be strong. Accepting the premise of market movement in EW means accepting the five-wave sequence that has become trading legend.

Elliott wave theory states that a market tends to unfold with three impulsive (trend) waves and two correction waves linking them. It works this way: wave 1 up, wave 2 correcting down, wave 3 back up to new highs, wave 4 correcting down, then wave 5 back up to new highs to complete the sequence (and vice versa).