Elliott Wave Magic Illustrated with Wave Charts

So you have come here looking for the elusive Elliott Wave magic! It was Robert Balan, an old friend, who once said “Can anyone parlay a $10,000 capital into $1,000,000 in a year? In five years? If so, how do you do it and what are the risks involved?”

I have been practicing Elliott Wave Analysis for over 25 years, and have made some astounding calls that came true. But I cannot honestly say that I was able to turn a mere $10,000 into a million dollars. Yet, I can confidently say that there are very few technical approaches to dealing with the uncertainties of the market place as efficiently as does the Elliott Wave Principle. What I will do is give you one example, and show you how the magic of the Elliott Wave Principle works in the Forex market.

Consider Sterling Pound (GBP/USD). Looking at the monthly chart going back to the early 1980s, and the daily chart, the magic of Wave Principle is that it works equally well in the monthly chart as it does in the 5-minute chart — though you should not try to day-trade using the monthly chart. The monthly chart suggested a long-term target for the Pound around 1.3300 (already reached 1.3498 at time of writing), while the daily chart pointed to a significant recovery, perhaps reaching as high as 1.6170, with risk levels along the way such as near 1.4900.

Suppose we are in the early 1990s and have already seen the first big move from 1.0520 to 2.0045 (Point A). When the second attempt failed to sustain above that level, a swift move down could be anticipated. A 61.8% retracement of Wave “A” would lie at 1.4158 — the move actually finished at 1.4063. The “c” wave that went from 1.7366 to 1.3677 was just 7 pips short of the 61.8% measure of the “a” wave. Wave “B”, from 1.3677 to 2.1161, was only 2 pips short of 78.6% of wave “A”. The Elliott Wave Principle asks us to always look for Fibonacci relationships between alternating waves.

On the daily chart, one could have placed a low-risk “buy” trade near 1.7450, marking a 161.8% projection of the first wave down. A common question beginners face is how to pick a level and call it the end of a wave. With hindsight it all looks clear, but in real time the key is to be honest to your paradigm and follow your rules to the letter — the biggest trading sin, second only to not having a stop loss, is constantly changing your rules.

When a fast sell-off occurs, calculate various projections and keep them close at hand. A first test of support (such as 1.7450) is rarely one to buy into immediately; typically a fast-moving market gives a retest of the lows, and a small position with a tight stop near the prior low, once buying interest is confirmed at the retest, tends to pay off.

Looking ahead: since Wave (2) at 2.097 was a ‘simple’ correction, there was a high probability for Wave (4) to be complex — and indeed the “B” wave came in as an irregular one, with the low well below the end of Wave (3). Accepting that count meant looking for Wave “C” within Wave (4) to go well above the top of Wave “A”, which is indeed what unfolded, with Sterling breaking above a declining downtrend line and continuing higher.

If one only worries about being ‘correct’ in making market calls, one will never be a good trader. A trader has to study the charts, make the most educated prediction about what happens next, and then execute the plan of action without wavering — including an affordable stop-loss and a plan to take profits along the way. To use the Elliott Wave Magic, one has to combine wave analysis with money management.