There are 13 basic patterns in Elliott Wave Analysis. I plan to discuss each one of them step by step on SA. Today I intend to discuss the first pattern in EWP, that is Impulse. An impulse consists of 5 waves, and it should satisfy 3 basic EWP rules.
Rule I - Wave 2 should never go below the start of wave 1.
Rule II - Wave 3 should never be the shortest of waves 1,3,5.
Rule III - Wave 4 should not enter the territory of wave 1.
The figure above shows a real life example and an idealized version of an impulse. No timestamps are shown on the real life chart, this implies these patterns can occur on any time frame.
Based on these simple rules, we can build failsafe in our trading method. For Instance if you suspect that we are about to begin a new up move, and already waves 1 is in place. All you have to do is to wait for the market to pull back a bit , and again resume the up move. Once it goes past the terminal point of wave 1 (a.k.a - breakout about recent high), you can enter into a long position, and put a SL below the start of wave 1. If at all the market drifts below the start of wave 1, we know that we are wrong on the possible direction of the market, and should at once recover our capital, by getting out of the position.
Once you have entered a long position and markets have rallied your position now has some profit. But as with life there are always setbacks in the way. So after rallying for a while prices will run into another resistance, as soon as we face resistance, i.e. wave 4, we should immediately move our stops to breakeven, because we know wave 4 should never enter the territory of wave 1. So if prices do come down and hit your stop loss, your initial view of an impulse was wrong, and hence you should get out of the markets.
But ideally prices should consolidate in wave 4, post which we should see another rally, that last one in this sequence. At this point we should be looking for booking profits, or at least move our stops to lock in most of the advance prices have made.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.