Enjoy this excerpt from Elliott Wave International's new, free Club EWI resource, the 32-page Commodity Trader's Classroom. (For quick details on how to read the entire lesson free, look below.)
Where Other Technical Studies Fall Short
Every trader has favorite techniques. But where traditional technical studies fall short, the Wave Principle kicks in to show high probability price targets and, just as importantly, how to distinguish high probability trade setups from the ones that traders should ignore.
There are three categories of technical studies: trend-following indicators, oscillators and sentiment indicators. Trend-following indicators include moving averages, Moving Average Convergence-Divergence (MACD) and Directional Movement Index (ADX). A few of the more popular oscillators many traders use today are Stochastics, Rate-of-Change and the Commodity Channel Index (CCI). Sentiment indicators include Put-Call ratios and Commitment of Traders report data.
Technical studies like these do a good job of illuminating the way for traders, yet they each fall short for one major reason: they limit the scope of a trader’s understanding of current price action and how it relates to the overall picture of a market. Most technical studies simply don’t reveal pertinent information such as the maturity of a trend and a definable price target -- but the Wave Principle does.
Here are 5 ways the Wave Principle improves trading:
1. Identifies Trend -- The Wave Principle identifies the direction of the dominant trend. A five-wave advance identifies the overall trend as up. Conversely, a five-wave decline determines that the larger trend is down. Why is this information important? Because it is easier to trade in the direction of the overriding trend, since it is the path of least resistance and undoubtedly explains the saying, “the trend is your friend.” Simply put, the probability of a successful commodity trade is much greater if a trader is long Soybeans when the other grains are rallying.
2. Identifies Countertrend -- The Wave Principle also identifies countertrend moves. The three-wave pattern is a corrective response to the preceding impulse wave. Knowing that a recent move in price is merely a correction within a larger trending market is especially important for traders, because corrections are opportunities for traders to position themselves in the direction of the larger trend of a market.
3. Determines Maturity of a Trend -- As Elliott observed, wave patterns form larger and smaller versions of themselves. This repetition in form means that price activity is fractal, as illustrated in Figure 1 [above]. Wave (1) subdivides into five small waves, yet is part of a larger five-wave pattern. How is this information useful? It helps traders recognize the maturity of a trend. If prices are advancing in wave 5 of a five-wave advance for example, and wave 5 has already completed three or four smaller waves, a trader knows this is not the time to add long positions. Instead, it may be time to take profits or at least to raise protective stops.
4. Provides Price Targets -- What traditional technical studies simply don't offer...
- How to Make Yourself a Better Trader
- How the Wave Principle Can Improve Your Trading
- When to Place a Trade
- How to Identify and Use Support and Resistance Levels
- How to Apply Fibonacci Math to Real-World Trading
- How to Integrate Technical Analysis into an Elliott Wave Forecast
(Already a free Club EWI member? Finish reading the report here.)