Home > Stocks
How Elliott Waves Help You Navigate in Uncertain Markets
One criticism we at Elliott Wave International sometimes hear about wave analysis sounds something like this: "Sure, it's easy to find Elliott wave patterns in market charts after they've been completed. But try and do it going forward. You never know what the pattern is until it's done, so what use is Elliott?"
Just to remind our new readers, here is what a basic Elliott wave pattern looks like: 5 waves up and 3 waves down. (In a bull market. In a bear, it's 5 down and 3 up.)
Every blanket statement is an exaggeration, and the one above is no exception. Still, it's true that when a wave pattern is just starting to develop, you don't know for sure what it will end up being. Sound like a weakness? Well, let's look at a couple of examples first. Say you are looking at a chart of your favorite market, and you see this:
What is this Elliott wave pattern? Well, at this point, it's not even a pattern -- it's just two legs of some future pattern. But that doesn't mean that as a trader or investor, you can't act on this limited picture. If you think the market is bullish and you're looking at waves 1 and 2 -- with wave 3 up next -- you can apply the First Rule of Elliott: Wave 2 cannot retrace more than 100% of wave 1. You can then put a stop-loss just under the start of wave 1 and watch what happens. Relax: You have managed your risk, and you know exactly where you're wrong.
Now, let's say your market shows three waves, like this:
Are these waves 1, 2 and 3 -- or are they A, B and C? The first scenario implies more bullish potential, but the second one means that the move is corrective and will at some point be completely retraced. Opposite views, yes -- but that doesn't mean that as a trader or investor, you can't act on this limited knowledge.
If it's a 1-2-3, then you know that once 3 is over, corrective wave 4 will take prices in the opposite direction: down, in this case. And if it's an A-B-C, you know that once C is over, prices will also reverse: also down, in this case. Conclusion: Impulse or correction -- that's unclear yet, but either way what should come next is a decline. You can put your stop-loss just above the top of the wave 3 (or C) and watch what happens. Relax: You have managed your risk and you know exactly where you're wrong.
As you can see, you don't always need to wait until an Elliott wave pattern completes itself before using it to your advantage. You would be hard-pressed to find another forecasting method that helps you navigate market uncertainty with the same precision.
You can see Elliott wave analysis of real markets right now in our latest publications -- risk-free: