Elliott Wave Theory is a great analytical tool to identify cycles and chart out a potential path in different time frames. Many traders believe that every single Elliott Wave Chart update represents a trading signal that they can trade. However, this is not really the case. Not every situation and count and path represent the highest probability trade. Traders need to understand that for every count presented, there exists at least 1 other alternate count if not more. The task therefore is to identify high probability setup using the Elliott Wave logic and Elliott Wave system. As we always say at EWF, everyday is a working day but not everyday is a trading day.
Thus we need to apply certain filter to identify high probability setup. This filter will become our trading system. But what exactly is a trading system? What does it need to have in order to be a reliable and complete trading system. At minimum, a reliable and complete trading system needs to have the following:
1. Rules of Trading
A trading system must have clear rules and criteria to trade. This includes rules which specify the conditions that must be present before a trade can be taken. For example, the system might have the following rules: Only trade the long side if 100 day moving average is above 200 day moving average. The system might further provide details such as enter the long trade when certain conditions in lower time frame exist. For example, the system might stipulate to enter long when RSI is 30 or less.
2. Consistent Logic For Entry, Stop Loss, and Target Profit
A trading system must specify exactly where and when to enter into any trade, what the stop loss should be, and what the target profit is. The trade setup here should be based on a consistent logic and criteria so we can replicate them in other trades. It should not be based on subjective or constantly changing criteria. For example, the system might say the entry will always be at 50% Fibonacci retracement and stop loss always below / above 61.8% Fibonacci retracement, and target profit is always also based on certain Fibonacci ratio. This system can be replicated in other trades with the same logic.
Please note a trading system without stop loss or relying on subjective manual closing is not a complete trading system. The biggest reason that traders get margin call is because they do not put stop loss and have no risk management in their trade. Knowing entry and stop loss and target profit before placing a trade is absolutely critical in order to calculate position sizing, risk per trade, and reward vs risk ratio.
3. Robust Risk Management
A trading system needs to have robust risk management. A good risk management requires traders to calculate position size and know the risk percentage before entering into any trade. Depending on the trading system, the system should ideally have reward vs risk which is at least 2 to 1. Any trading system without a good R:R ratio must rely on very high winning rate. This is difficult to maintain in the long run as market behavior constantly changes. On the other hand, a trading system with a R:R ratio of at least 2 to 1 only requires 45 – 50% winning ratio in order to be profitable.
At EWF, we do provide Elliott Wave chart forecasting service. We have many different types of clients from hedge fund, long term investors to intra-day traders. They all trade differently. Some of our clients have their own trading system. For these types of clients, they will use the Elliott Wave chart as the map or confirmation. For those without any trading system, EWF also provides our own system to trade. We trade incomplete bullish / bearish sequence and buying / selling pullback in 3, 7, or 11 swing. We explain this method to members and implement it in Live Trading Room. Our own trading system satisfies all the criteria above.
To summarize, Elliott Wave is very useful to identify cycles and project the path. However, every single update is not automatically a trading signal. We need a trading system based on Elliott Wave logic which satisfy all the criteria above.
If you want to learn more about our Elliott-Wave based trading system, feel free to join our trial here –> 14 days FREE TrialBack