Part V. Trading Elliot Waves

Trading Elliot Waves - Forex School

Commander in Pips: Today we start the last part in the chapter that is dedicated to Elliot waves theory. And, as usual, we will discuss its practical application – how to trade them. You probably have guessed already, that the approach to EW is based generally on rules that we’ve specified in previous parts. Based on these rules we will estimate the wave, future direction where to place stops and other important moments.

Pipruit: Ok, I’m ready.​

Dedicated to Elliot waves theory - Forex School

Commander in Pips:
 Here is the first chart – daily EUR/USD and 5-wave impulse move. Let’s start from it:

Chart #1 | EUR/USD Daily
Daily EUR/USD and 5-wave impulse move - Forex School

Let’s assume that we take a look at point [2] and assume that this is the second wave. Here we could apply Rule #2 - “Second wave never could be beyond the start of 1st wave”. This rule tells us where we should place our stop according to EW theory – below the low of the 1st wave.

Second that we know – “Waves 2 and 4 typically retrace to Fibonacci retracement levels”. Here we see that market has reached 0.382 Fib support from wave 1.

Pipruit: Wait a minute. I have a couple of questions already, Sir. First – how do we know, that market will not retrace to deeper Fib support? Second – why in general you’ve decided that this is second and retracement wave?​

Commander in Pips: I will answer on your second question first. If you will take a look at [1] – [2] waves closer, you will see that this is full 5-3 wave pattern. Look:

Chart #2 | EUR/USD Daily
Waves 2 and 4 typically retrace to Fibonacci retracement levels - Forex School
Now how do we know, that market will not retrace to deeper Fib support? You forget about all previous material all of the time. Here is a coincidence of Fib extension target and Fib support level – Agreement. That’s why it’s logical to make an attempt to buy from here, at least half of your desirable position. If the market will go lower – you will be able to add more. May be this looks logical in the current environment, because the stop loss order rather far from entry point. 

The second area, where you can add to position – next Agreement is at 0.618 Fib support and 1.618 Fib extension target. But when you enter after the second wave – it makes sense to enter aggressively, because you expect the largest wave to be the third wave. That’s why it’s better to have even part of your position with a far stop loss and add later (if market will allow you to do that), than to not have any position and wait for a deeper entry point. 

Chart #3 | EUR/USD Daily – Entry at the end of wave 2 that is Agreement area
EUR/USD Daily – Entry at the end of wave 2 that is Agreement area - Forex School
Pipruit: Cool. I see, and what if I’ve skipped due to some reason this entry, how could I enter in continuation?​

Commander in Pips: There is couple of possibilities for that. First is to try enter on some shallow retracement during the third wave, that has appeared was the longest among the others. But this way is a bit difficult, since you will have to drop your time frame and make other things that we’ve not studied yet. So, that’s why we will talk about a second possibility – wait for the 4th wave.

Here we will apply the same rules - rule #3 “Wave 4 could never overlap with 1st wave” and the same additional rule - “Waves 2 and 4 typically retrace to Fibonacci retracement levels”. Now take a look at chart #1 again. See, 4th wave almost has reached 0.382 Fib support. By the way – this is the only level, from which you can enter, because 0.618 Fib support stands below the high of 1st wave , so you can’t enter there, because it contradicts with rule #3. There you can place your stop and wait for 5th wave. That has happened.

Pipruit: Wow. It’s so logical. The rules work great. And can we decompose the third wave into a 5-wave pattern as on my picture below:​

Chart #4 | EUR/USD Daily –Pipruit’s decomposition of 3d wave
EUR/USD Daily –Pipruit’s decomposition of 3d wave - Forex School
Commander in Pips: No, we can’t do this. Because it contradicts with rule #1 – “Wave 3 could never be the shortest impulse wave”. In our case we talk about your 3d sub-wave. See – it’s the smallest among the others. That’s impossible.

Pipruit: Oh, how could I forget that? Thank you.​

Commander in Pips: Well, we’ve talked about EW on past charts, so it’s much simpler to do than in real time. But applying all skills that you have, not only about EW but candlesticks, indicators, Fibonacci and others will let you to trade successfully. Besides, your skills with EW will improve as you will work hard and diligently.

Although we generally speak about EUR/USD, but I suppose it will not be a mistake if we take a look at a monthly Cable chart and try to make a forecast, based on EW for further moves. I’ve marked waves for you and important areas, so how do you intend to act here?

Chart #5 | GBP/USD monthly with EW
GBP/USD monthly with EW - Forex School

 Ok, let’s see. On previous upside move there was 3d wave that extended. Cool… So now we see that down trending move is developing. The market has turned to corrective 3-wave pattern and it takes the Zigzag form as ABC. So it’s logical to search a possibility to enter short somewhere at the end of wave 4. But how to estimate where it will be…​

Commander in Pips: All that you’ve said is correct. Pay attention to the markings that I’ve made for you. Just look carefully – remember all important stuff is in nuances that are not seen by most participants. Remember what we’ve discussed earlier.

Pipruit: All right. Since this is the 4th wave, applying the same rules, we can say, that a move down should reestablish from one of the Fib resistances. Market currently has hit 0.50. But you have occasionally marked for me 0.618, curious…
Commander in Pips: Any thoughts?

Pipruit: Well, just one. I suppose that there is an Agreement of Fib extension of AB-CD move, i.e. of corrective wave. Due the moment that CD move (current move up) is flatter than the AB move – it’s hardly likely that the market will go farther than the 100% extension target, especially taking into consideration that there will be an Agreement. So, it looks like that establishing a short from 0.618 area, after the moment, when market will hit 100% target seems logical. I’ve drawn it on the following chart:​

Chart #6 | GBP/USD monthly Agreement by Pipruit
An Agreement of Fib extension of AB-CD move - Forex School
Commander in Pips: Excellent! Please, continue.

Pipruit: Well, Also applying the rule, that 4th wave could not ever overlap with 1st one – we should place stop somewhere above 0.88 Fib resistance, that is slightly higher than the low of the 1st wave. That’s why you’ve marked it with a blue circle. Then we should await the development of a 5th wave to the downside.​

Commander in Pips: That’s right, and can you tell something about the potential depth of 5th wave, is truncation possible there?

Pipruit: I’m sorry, Commander, but here is where my skills are finished.​

Commander in Pips: Ok, I added to your analysis a bit, if you don’t mind. You forgot about very important tool - oversold and overbought analysis. Take a look at chart #7 below and you will see how it important:

Chart #7 | GBP/USD monthly – some add-ons
GBP/USD monthly – oversold and overbought analysis - Forex School
All that I’ve added – blue wave lines. This is DiNapoli “Oscillator Predictor”. It shows levels of monthly oversold (lower border) and overbought (upper border). Here we can use simple Detrended Oscillator, by applying algorithm of calculation oversold and overbought levels, as we did in corresponding chapter, but here I want to save some space, so I used an indicator that shows particularly these levels. So, what it could tell us?

1. Take a look at an area, where we want to enter short – this is not just Agreement. This is also the level of monthly overbought! The market hardly will pass through it without solid retracement. So, even if we will enter short, and occasionally become wrong – we will have enough time due overbought downward pullback to move our stop loss to breakeven.

2. Now take a look at rectangle around the 1.35 area. See – this is level of monthly oversold and 0.618 Fib extension target from large ABC pattern (marked by dot line). This oversold is very close to low of the third wave. Hence, the 5th wave will develop on oversold and Truncation is possible. 

See – simple oversold/overbought analysis gives us more confidence with our entry point and potential target where to fix profit – 1.3560 area roughly.

Pipruit: I can’t believe it. It looks like I have to be more careful with details to not loose money…​

Commander in Pips: Yes, that’s it. But do not be frustrated too much – this will come with experience. Now, let’s take a look, how it will turn. May be we will be totally wrong, heh…


Hamza Samiullah
6 years ago,
Registered user
nice talk
5 years ago,
Registered user
Dear Sir Sive Morten !
I"ve read all of the series of EW that you wrote for us , and i must consider these lessons are the best free source about EW that i can find on the Internet . It helps me a lot to understand the theory and the way to apply it in trading .
Thank you so much , and best wishes for you !
5 years ago,
Registered user
Great piece.
5 years ago,
Registered user
Great information
3 years ago,
Registered user
When you shifted to second example "chart 5" , I was waiting to hear that move is a correction of the whole up move preceding it . But you treat it like a separate move of full cycle 5 waves!!!
Are we can treat all correction moves like a 5 impulse ?

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