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Using Elliott to Trade Options, Stocks, Cryptos? "Yes."

Ex-Wall Street trader on his favorite market to trade with Elliott waves

by Vadim Pokhlebkin
Updated: June 01, 2018

Todd Gordon's resume includes two Wall Street firms and a long record of trading his own money. Today, Todd is the founder of TradingAnalysis.com and a regular contributor to CNBC shows like "Fast Money" and "Squawk on the Street."

On May 10, we sat down with him in our ElliottWaveTV studio to learn more about his very transparent, Elliott wave-based trading style.

In this clip:Todd's trading style; favorite markets; trading Elliott wave corrections.

Vadim: In your work, you focus on forecasting and trading, cryptocurrencies, Bitcoin is one of your favorites, and also markets like stocks, individual stocks and options, like equity options. Of all these markets, which one do you think Elliott applies to best in today's markets?

Todd: When I started out as a directional underlying trader, my first job when I was 21, 22 out of college was prop trading equities. Then, I went to the futures side on a CTA then trading for an exchange. Whatever that is, that's a directional bet. You have to be right and you have to be wrong. If the market doesn't go in your direction, you're going to lose money. You're going to lose money. When I started overlaying options onto my Elliott Wave knowledge, a whole new world opened up. You can take advantage of a directional move according to the Elliott Wave model, but markets probably only trend 20 or 30 percent of the time. That means 70 to 80 percent of the time, you're going to be out of the market. There's very few traders who have that discipline to sit on their hands for that period of time. When you start overlaying options strategies inside of corrections that are defined by the Elliott Wave theory, specifically elongated fourth waves, and you have an idea based on the Y axis, which is price, and X axis, which is time, and you have an idea of how long that correction should last, you can start selling options via butterflies, iron condors, straddles, strangles. You can take advantage and generate return inside Wave's markets that occur 70 percent of the time, whatever the statistic accurately may be. Options are wonderful because you can take advantage of I call it a directional market or a correctional market.

Vadim: That makes sense. I now understand why options is a favorite.

Todd: Then cryptos, the volatility, the realized volatility in cryptos has just been. I've never seen, I've only been trading for 18 years or 17 years. I've never in my lifetime, in my trading lifetime, seen such clear Elliott Wave patterns because of the realized volatility that's just driving these markets. It's unbelievable the movement we're getting into the emotional masses, creating price change that creates beautiful Elliott Wave counts, which creates opportunity. The clearer the wave count, the easier it is to define our entry, our exit on a stop loss, our take profit if the trade works. That volatility creates beautiful Elliott Wave counts, which very clearly defines our trading plan.

Vadim: This brings up a very important point. You mentioned that options allow you to have more opportunities during market corrections. Of course, our viewers know that Elliott Wave analysis has a lot more corrective patterns than impulsive patterns just because there is a lot more variety of directions the market can go during the correction.

Todd: Sure.

Vadim: How do you choose which count to trade during a correction?

Todd: That's one of the things that it kinda bums me out a little bit that people think if it's subjective, it must not work. Elliott Wave I think, unfortunately, gets labeled as too subjective by few who dabble in it briefly. They realize the decision needs to be made and then sometimes they push it aside because they say, 'oh no, I have to make a decision.' 'I don't know what the future holds with certainty.' It breaks my heart to see that. What is written in our life? What is certainly, there's very few things, death and taxes, that are going to happen to us. I think it's so important to go into a trade with a primary intended direction. If that doesn't happen, if your life plan doesn't lay out or unfold according to plan, you better have a backup, just like a general going into battle, right? Would a general go in and say this is the only way the war is going to unfold? Absolutely not, you have plan B. If plan A doesn't happen, you quickly enact plan B. A trade is the same way. That's why I love Elliott so much because you have multiple scenarios of what the future may hold. You act based on your intended direction to primary count but if the primary count doesn't happen, then you have the alternate. The alternate might involve exiting the trade and containing risk. If the alternate happens, maybe you change your options strikes, you change your options expiration. Most of the time when I go into trades, I have one or two or maybe even three wave counts to say here's what might happen. You never want to be surprised in a trade. You never want to be surprised 'cause when you get surprised, 'Wait, I didn't know the market was supposed to do that.' That's when you start revenge trading. You start getting a little upset. 'The market is doing this to me, wait a minute.' 'I didn't see this happening.' When that happens, that's when you start making costly trading errors. I like to say if I'm wrong, here's where I'm wrong. If I'm right, here's where I'm right. We're going to make money. If I'm wrong, I'm going to lose this amount of money. If you've accounted for either side, that's great. Sometimes with options, as you mentioned, sometimes in a fourth wave, like for example, if you guys can picture this in your mind, say you have a beautiful wave three move up. We're expecting a wave four. You get an initial ABC down. Probably not all of wave four, right? That's probably just A of four. There's a couple strategies you could put on. You could sell a put spread below. If wave four is over, and we're going to move up in wave five, that put spread is all yours to collect. If it is just A of wave four, we're still going to have a B wave rally up and then maybe a C wave to a higher low and then D and then E. The market maintains its level. That put spread you sold below the market is still yours to keep.

Vadim: Just less of it.

Todd: Just less of it, right. It's not going to decay as fast 'cause those options are going to stay closer to the money. There's great strategies like a butterfly or an iron condor or strangles or straddles that can take advantage of corrective structure. A lot of times, you're in a trade, and you're making money and you're not exactly sure what the count is. Too many people are unsure because they don't know exactly what's happening. But I don't think any of us know exactly what's happening in this life. Just trust the unknown.

Vadim:Of course, that's exactly what every Elliott Wave manual out there will teach you is to have a backup plan.

Editor's note: In the full version of this interview, you'll see Todd Gordon explain why technical analysis still works in the age of AI; examining Elliott wave patterns in QQQ and NVDA to see if the trades are ripe for harvesting, and much more. Follow the fast, free steps below to watch the full interview.

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