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Applying Technical Analysis
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Applying Technical
Analysis




Updated Feb 99




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Applying Technical Analysis
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TRADING TECHNIQUES, INC.

DISCLOSURE AND DISCLAIMER
The information presented in this manual is con- Past performance is not a guarantee of future re-
fidential and proprietary to Tom Joseph and Trad- sults. Only risk capital should be invested in the
ing Techniques, Inc.. This information cannot Futures or Stock Market or any other financial in-
be used, disclosed, or duplicated, without the strument. Neither Trading Techniques, Inc., nor Tom
prior written consent of Tom Joseph or Trading Joseph, nor anyone else representing Trading Tech-
Techniques, Inc.. This work is protected by the niques, Inc., or Tom Joseph, take or assume any
Federal Copyright laws and no unauthorized responsibility or make any guarantees or make any
copying, adaptation or distribution is permitted. specific trading recommendations in any of the above
mentioned products, any of their additions, revisions,
The material represented in the GET computer and addenda. All investments and trades carry risk,
software, the GET User's Guide, Technical Sec- and all trading decisions of an individual remain the
tion and any additions, revisions, or addenda, responsibility of that individual.
are believed to be accurately presented. How-
ever, it is not guaranteed as to accuracy or com- The client acknowledges and agrees that neither Tom
pleteness, and is subject to change without no- Joseph nor Trading Techniques, Inc., (or their re-
tice, at any time. There is no guarantee that the spective heirs or successors) makes any representa-
systems, trading techniques, trading methods, in- tion or guarantee regarding the information and tech-
dicators, and/or other information presented in niques described in the above mentioned products
this manual will result in profits, or that they marketed by Tom Joseph or Trading Techniques,
will not result in losses. It should not be as- Inc., or regarding how it may perform in the future;
sumed, or is any representation made, that the regarding client's ability to utilize the information
methods presented in the GET Software or User's and techniques described in the above mentioned
Guide, any additions, revisions, and addenda, can products; or regarding client's likelihood of success
guarantee profits in the Futures or Stock Mar- in attempting to utilize same. In the event that any
ket or any other financial market instruments, or liability is alleged or awarded in any forum notwith-
that future performance will equal that of the standing the above, such liability shall be limited to
past. the price paid by the client for the aggregate of all
products purchased by client from Trading Tech-
niques, Inc., or Tom Joseph.



The Expert Trend Locator (XTL) is NOT a mechanical Trading System. The XTL is
one of the many Studies (methods) available in Advanced GET.

The hypothetical computer simulated performance results provided are believed to be accurately presented.
However, it is not guaranteed as to accuracy or completeness and is subject to change without any notice.
Hypothetical or simulated performance results have certain inherent limitations. Unlike an actual performance
record, simulated results do not represent actual trading. Since, also, the trades have not actually been executed,
the results may have been under or over compensated for the impact, if any, of certain market factors such as
liquidity. Simulated trading programs in general are also subject to the fact that they are designed with the benefit
of hindsight. No representation is being made that any account will, or is likely to achieve profits or losses similar
to those shown. All investments and trades carry risks.




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Technical Table Of Contents

Elliott Wave Technique ................................................................................................ T-5
Impulse Patterns ....................................................................................................................... T-6
Indicator To Provide Elliott Wave Counts ............................................................................. T-9
Elliott Oscillator: Step-By-Step Illustration ....................................................... T-11
Minimum Pull Back Required ............................................................................................... T-15
Maximum Oscillator Pull Back ............................................................................................. T-16
Using The Elliott Oscillator in Wave Three ......................................................................... T-17
Using The Elliott Oscillator in Wave Four ........................................................................... T-18
Using The Elliott Oscillator in Wave Five ............................................................................ T-19
Oscillator Breakout Bands ..................................................................................................... T-20
Adding PTI (Profit Taking Index)......................................................................... T-21
Adding Wave Four Channels ............................................................................... T-23
Profit Taking Index & Wave 4 Channels............................................................. T-24
Adding Displaced Moving Average (DMA) ........................................................ T-25
Elliott Wave Rules & Guidelines .......................................................................... T-26
Elliott Wave Corrections ....................................................................................... T-27
Alternation Rule ..................................................................................................................... T-31
Wave Measurements & Ratios ............................................................................. T-32
Ratios For Wave Three .......................................................................................................... T-34
Ratios For Wave Four ............................................................................................................ T-34
Ratios For Wave Five ............................................................................................................. T-35
Elliott Channels For Top Of A Wave Five............................................................................ T-36
Statistical Analysis of Wave Two Ratios ............................................................................... T-37
Statistical Analysis of Wave Three Ratios ............................................................................ T-38
Statistical Analysis of Wave Four Ratios.............................................................................. T-40
Elliott / Fibonacci Ratios ........................................................................................................ T-42
Elliott / Fibonacci Ratios For Wave 5 ................................................................................... T-43
Rules: Type 1 Trade .................................................................................................... T-44
Rules: Type 2 Trade .................................................................................................... T-45
Examples Of Type One & Type two Trades ......................................................................... T-46
Type One Buy Setup ............................................................................................................... T-47
Type Two Buy .......................................................................................................................... T-48
Type Two Sell Setup ................................................................................................................ T-49
Forecasting A Double Top ...................................................................................................... T-50
Fifth Wave Failure Setup ....................................................................................................... T-51
Power of 60 Minute Charts ........................................................................................ T-65
Cross-Referencing to Weekly Data ........................................................................... T-80


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Alternatives In Elliott Wave Analysis ....................................................................... T-84
Locallized Elliott Wave Counts: ............................................................................................ T-84
Alternate Counts ..................................................................................................................... T-84
Alternate 3 (Long Term) ....................................................................................................... T-85
Alternate 2 (Short Term)....................................................................................................... T-86
Alternate 1 (Aggressive) ........................................................................................................ T-87
Gann Techniques ........................................................................................................ T-90
Gann Angles And Lines ......................................................................................................... T-91
Using Gann Angles With Elliott Waves ................................................................................ T-95
Optimized Gann Angles ......................................................................................................... T-97
Gann Box Analysis ................................................................................................................. T-98
Regression Trend Channels .................................................................................... T-105
T.J.™s Web Levels ...................................................................................................... T-107
Fibonacci Time Clusters........................................................................................... T-112
Fibonacci Extension Price Clusters .................................................................................... T-115
Fibonacci Retracement Price Clusters .............................................................................. T-117
Andrews Median Lines............................................................................................. T-120
Extended Parallel Lines ....................................................................................................... T-123
Extended Parallel Lines ....................................................................................................... T-124
Combining Median Lines With Wave 3 ............................................................................. T-127
Automatic Regression Trend Channels .................................................................. T-129
Expert Trend Locator - XTL ................................................................................... T-132
Designated Use For XTL ............................................................................................................ T-135
Settings For XTL: ...................................................................................................................... T-135
Taking Profits: ............................................................................................................................ T-139
Trade Continuation: ................................................................................................................... T-140
Guidelines for Trade Continuation ........................................................................................... T-141
Using Different Settings for XTL .............................................................................................. T-142
MOB (Make or Break) ............................................................................................. T-147
Bias Reversal ............................................................................................................. T-156
Elliott Wave Trigger ................................................................................................. T-158
T.J™s Ellipse................................................................................................................ T-160
Ellipse Projection (Shadow): ............................................................................................... T-163
The Joseph Trend Iindex (JTI) ................................................................................ T-167
How Can JTI Be Used .......................................................................................................... T-172
Cycles ......................................................................................................................... T-173
Trade Pofile .............................................................................................................. T-176

Applying Technical Analysis Index ...........................................................................T179

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Elliott Wave Technique
The Practical Approach” In Conjunction With GET

Elliott Wave is a collection of
complex techniques. About
60% of these techniques are
clear and easy to use. The
other 40% are difficult to
identify, especially for the
beginner. The practical and
conservative approach is to
use the 60% that are clear.
When the analysis is not
clear, why not find another
market which is conforming to an Elliott Wave pattern that is easier
to identify?

From years of fighting this battle, I have come up with the following
practical approach to using Elliott Wave principles in trading.

The whole theory of Elliott Wave can be classified into two parts: (a)
impulse pattern and (b) corrective pattern. We will discuss the
impulse pattern and how to use the Elliott Oscillator to identify these
impulse patterns. We will then discuss some general rules and guide-
lines followed by numerous examples.




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Impulse Patterns
The impulse pattern consists of five waves. The five waves can be in either direction, up
or down. Some examples are shown below.
Wave 5 Downward
Upward Wave 2
Impulse
Wave 3
Impulse
Action
Action
Wave 1
Wave 4 Wave 4
Wave 1




Wave 2 Wave 3 Wave 5




The first wave is usually a weak rally with only a small percentage of the traders partici-
pating. Once Wave 1 is over, they sell the market on Wave 2. The sell off in Wave 2 is
very vicious. Wave 2 will finally end without making new lows and the market will start
to turn around for another rally.
Vicious selling
in Wave Two
1



2 Wave Two will not
make new lows

The initial stages of the Wave 3 rally is slow and it finally makes it to the top of the pre-
vious rally (the top of Wave 1). At this time, there are a lot of stops above the top of
Wave 1.

Traders are not convinced of the upward
STOPS
trend and are using this rally to add more 1
Top of Wave One
shorts. For their analysis to be correct, the
market should not take the top of the pre-
Wave Three in
vious rally.
2 initial stages
Therefore, a large amount of stops are
placed above the top of Wave 1.

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The Wave 3 rally picks up steam and takes the top of Wave 1. As soon as the Wave 1
high is exceeded, the stops are taken out. Depending on the amount of stops, gaps are left
open. Gaps are a good indication of a Wave 3 in progress. After taking the stops out,
the Wave 3 rally has caught the attention of traders.

Wave Three
in progress



Gap of Wave Three
STOPS
1
Top of Wave One



2

The next sequence of events are as follows: Traders who were initially long from the
bottom finally have something to cheer about. They might even decide to add positions.

The traders who were stopped out (after being upset for a while) decide the trend is up
and they decide to buy into the rally. All this sudden interest fuels the Wave 3 rally.

This is the time when the majority of the
Traders 3
traders have decided that the trend is up.
buying
Finally, all the buying frenzy dies down,
Wave 3 comes to a halt. In general,
Stops
a majority
taken
of traders
Profit taking now begins to set in. Trad- out
1 decide and
ers who were long from the lows de-
agree that
cide to take profits. They have a good
the trend
trade and start to protect profits. is up.
2
This causes a pullback in the prices
and is called Wave 4. Wave 2 was a
vicious sell-off, Wave 4 is an orderly
profit taking decline.




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While profit taking is in progress, the majority of traders are still convinced the trend is
up. They were either late in getting in on this rally, or they have been on the sideline.
They consider this profit taking decline as an excellent place to buy-in and get even.

On the end of Wave 4, more
buying sets in and the prices Profit
3
start to rally again. taking
decline

Vicious
4
sell-off
1



2



The Wave 5 rally lacks the huge enthusiasm and strength found in the Wave 3 rally. The
Wave 5 advance is caused by a small group of traders.

While the prices make a new high above the top of Wave 3, the rate of power, or
strength, inside the Wave 5 advance is very small when compared to the Wave 3 advance.

Finally, when this lackluster buying
5
interest dies out, the market tops
out and enters a new phase.
3

Rally with Price makes
great strength new highs.
However,
4
strength in
rally is weaker
1
in comparison
to the third
wave rally.
2




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Indicator To Provide Elliott Wave Counts
The examples of five wave impulse patterns shown on the previous page are very clear and
definitive. However, the markets are not that easy all the time. It becomes almost impossible and
very subjective to identify Waves 3 and 5 from looking at price charts alone. The price chart
fails to show the various strengths of the waves. The following illustration is used to discuss this
concept. Two drivers left the same town at the same time in different vehicles. Driver A drove
within speed limits all the way, while Driver B exceeded the speed limit .


DRIVER A ”
ALWAYS WITHIN SPEED LIMIT




DRIVER B ”
TOOK A
DIFFERENT ROUTE;
EXCEEDED THE
SPEED LIMIT.




Both drivers took the same amount of time and traveled the same distance. However, the two
drivers used different strategies to arrive at their destination. While Driver A proceeded at a
normal speed, Driver B drove like a bat-out-of-Hades, so to speak. An observer at the other
end would be unable to tell the difference between the two drivers driving patterns. To a
casual observer, both left the same time and arrived at the same time. This is the same
problem we face when we try to distinguish between Waves 3 and 5. Wave 5 makes new
highs; a trader looking at price charts may not be able to tell the difference between a
Wave 3 or Wave 5. However, the internal price pattern of Wave 3 is much stronger in compari-
son to that of Wave 5. Therefore, we need to use an internal strength measuring indicator to tell
the difference.


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Indicator To Provide Elliott Wave Counts
To keep tab of the Elliott Wave logic, we require an indicator that measures the rate of
price change in one wave against the rate of price change in another wave. Standard
indicators fail to perform this comparison. They merely compare price against price and
fail to compare the rate of price action. After years of research, the Elliott Oscillator
was developed. The idea of the oscillator is described below.

An Elliott Oscillator is basically calculated
Wave Three Rate of price
from finding the difference between two
increase is
moving averages. If we were to use a small
much faster
moving average and a large moving average,
the difference between the two will show
the rate of increase in prices.
Small moving aver-
age representing
The small moving average represents the current prices
Difference
is large in
current price action, while the larger moving
Wave 3
average represents the overall price action.

When the prices are gapping up inside a
Wave 3 the current prices are surging; the Large moving average
representing
difference between the small and large mov-
price actions
ing averages is great and produces a large
oscillator value.

However, in a Wave 5 the cur-
rent prices are not moving up at
a fast rate and, therefore, the Wave Five
difference between the small
and large moving averages is
Rate of price increase is slow
minimal. This produces a
smaller oscillator value.

The analogy is similar to the Difference is very
small in Wave 5
two drivers.

Wave 3 is like Driver B who
accelerates beyond speed lim-
its and has a higher rate of
speed, while Wave 5 has a
slow, dragging price action.

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Elliott Oscillator: Step-By-Step Illustration ”

We will use the same chart for illustration. When the prices rally above the top of Wave
1, the Elliott Oscillator is making new highs. Notice also the gapping action. The current
rally is labeled Wave 3.

Finally, the buying subsides in Wave 3. Traders begin to take profits. However, the gen-
eral public is eagerly waiting for a neutral area to buy into this market. When the Elliott
Oscillator pulls back to the zero level, or slightly below, the market is entering a neutral
area.



Sample Price Bar Chart 5

3



Prices making
1 4 new highs, but
no lasting strength
2




Small and Large Moving Average


Small MA
represents
Current prices
current
moving with slower
price
rate shows wave
five
Larger MA represents overall price

Current prices moving up rapidly
shows wave three




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Once Wave 4 is over, buying comes in from traders who missed the entire Wave 3 rally.
The prices move to new highs. However, the rally does not have the fast rate of price
increase that was seen in Wave 3. This difference in the rate of price is picked up by the
oscillator and can be easily identified. MORAL OF THE STORY: Always let the Elliott
Oscillator track Elliott Wave counts.

Sample Price Bar Chart 5

3



Prices making
1 4 new highs, but
no lasting strength

2



Small and Large Moving Average

Small MA
represents
Current prices
ø
current
moving with slower
price
rate shows Wave
µ Five
Larger MA represents overall price

Current prices moving up rapidly
shows Wave Three



The Elliott Wave Oscillator
Prices making new
Majority accepting the trend
ø
highs without strength
ø




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Identifying a five wave impulse
Five Wave Impulse (up) using the Elliott Oscillator,
(UP) which is part of the software.
3
5
Strength
ö Divergence
in rally



Elliott
Oscillator
pulls back
to zero
·
5




3


µ
New
New
highs
Phase
with
less
4
strength
µ
Labeled as
µ Wave Four
Rally
because
with strength
oscillator
labeled
1
pulled back
as Wave
to zero
Three


2




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Identifying a five wave
Five Wave Impulse (DOWN) impulse (down) using the
Elliott Oscillator, which is
part of the software.
2


Labeled as
Wave Four
1
because
oscillator
pulled back
to zero
·
Decline ö 4
with strength


New Phase
ø
New ö
3
lows
with less
strength


5

µ
Elliott
Oscillator
pulls back
to zero


Divergence
5
3




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The Elliott Oscillator
Minimum Pull Back Required
Historically, 94% of all Wave 4 sequences that have ended in a Wave Five making a new
high or a new low, had the Elliott Oscillator pull back at least 90% from the Wave 3 peak.



90%




5
3




4

Elliott Oscillator
(not shown to any scale)

Divergence




0


Minimum
90% Pullback
Required




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The Elliott Oscillator
Maximum Oscillator Pull Back
Just as it is important for the Oscillator to pull back to the zero line (or at least 90% of the
Wave 3 Oscillator as discussed on the previous page) it is just as important that the
Oscillator does NOT pull back more than 38% of the Wave 3 Oscillator on the other side
of the zero line.


90%



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38% of the Wave 3 Oscillator

5
3




4

Elliott Oscillator
(not shown to any scale)

Divergence




0
Minimum
90% Pullback
Required
Maximum Pull Back = 38%
of Wave 3 peak in the
Opposite Direction


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Using The Elliott Oscillator in Wave Three

¤ When a market rallies with a strong Elliott Oscillator as in Chart A, the rally is
classified as a Wave Three.




Chart A Chart B


Wave 3 ö




Once Wave 3 is over,
profit taking sets in.




Strong Oscillator ö

Oscillator
Pullback to
ï Zero




¤ Once Wave Three is over, the market will pull back on a profit taking decline.
During the profit taking decline, the Elliott Oscillator should pull back to zero (as
shown in Chart B).



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Using The Elliott Oscillator in Wave Four

¤ Once the Elliott Oscillator pulls back to zero, it signals the end of a potential Wave
Four profit taking decline as shown in Chart A.




Chart A Chart B
New Highs °




±
New
Buying
ö
Profit Taking ö
Decline Over Profit Taking
Ended




Oscillator
Pullback to
Zero

ò




¤ New buying comes in and the market makes new highs (as shown in Chart B).




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Using The Elliott Oscillator in Wave Five



¤ The market is making a new high with less strength in the Elliott Oscillator as shown in
Chart A.




Chart B
Chart A
New High °
When 5 Waves are com-
plete, the market changes °
direction




With Good Oscillator
Divergence
±
Previous
Wave 4
Oscillator Low
Divergence




¤ This indicates that the current rally is a Wave Five and once the Fifth Wave is over, the
market should change direction.

¤ When the market changes direction after completing a Five Wave sequence, the previous
Wave Four will become the first target. In Chart B, the market changed direction and is
trying to test the previous Wave Four low near 3630.




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OSCILLATOR BREAKOUT BANDS
A major task in using Elliott Wave Analysis is to identify Wave Three's accompanied with a strong Oscil-
lator. In the past we have done this by
visually comparing the size of the cur-
rent Oscillator with that of the past.
The Oscillator Break Out Bands pro-
vide an UP Band and a LOW Band.
Anytime the software labels a Wave
Three, the Oscillator needs to be
comfortably above the Break Out
Band. We recommend a setting of
80% for these bands.

The chart on the left is the Daily Swiss
Franc Dec 94 contract. Here the soft-
ware labels a Wave Three Rally and
this rally is accompanied by a strong
Oscillator that is breaking above the
Breakout Bands.

Therefore, this Wave Count can be
Oscillator above used for this market at this time. An-
Breakout Band. other example is shown below where
the Oscillator is above the Breakout
Band and confirms with the Elliott
Wave analysis.




Confirmed Wave Three in progress.




Oscillator above Breakout Band.
®




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Adding PTI (Profit Taking Index) - Theory
Using Elliott Wave analysis, any major rally or decline can be classified as a Wave Three.
Once a Wave Three is in place, Elliott Wave theory continues to look for a Wave Four
Retracement followed by second attempt in the same direction. This last phase is called
Wave Five.
WAVE FIVE - 2nd
5
attempt in the same
direction.
3
WAVE FOUR
Retracement
WAVE THREE
4
WAVE THREE
Initial Strong
Initial Strong
Rally 4 Decline
WAVE FOUR
Retracement

3

5
WAVE FIVE - 2nd
attempt in the same
direction.

RALLY PHASE DECLINE PHASE
The above patterns are completed Five Wave sequences and are great after the fact.
However, while the pattern is in progress, the Trader is left with a major dilemma at the
end of the WAVE FOUR Retracement. This dilemma is because many times the 2nd
attempt fails to materialize.

Anticipated
WAVE FIVE - 2nd
5 5
WAVE FIVE
attempt in the same
direction.
3 3

WAVE FOUR
WAVE THREE WAVE THREE Retracement
4
Initial Strong Initial Strong
Rally Rally
4
WAVE FOUR
Retracement
Market continues to
drop without reversing.




Normal Five Wave Pattern False Five Wave Pattern

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From our years of research and development, we designed the Profit Taking Index (PTI).
The Profit Taking Index compares the Buying/Selling momentum in Wave Three with the
Buying/Selling momentum in Wave Four. This comparison is then passed to an algorithm
that calculates the PROFIT TAKING INDEX VALUE.


CASE 1 - Normal Five Wave Pattern
WAVE FIVE - 2nd 5
attempt in the same
Statistically, if the Profit Tak- direction.
3
ing Index is Greater than 35,
the market exhibits a greater WAVE THREE
59
tendency to initiate a Fifth Initial Strong
Rally
Wave or a 2nd Attempt 4
PTI
Phase. WAVE FOUR
Retracement




CASE 2- False Five Wave Pattern
3
Statistically, if the Profit Tak-
29 ing Index is LESS than 35,
WAVE THREE
4 the market generally FAILS
Initial Strong
PTI
Rally to initiate a Fifth Wave or 2nd
Attempt Phase.
Market continues to
drop without reversing.




CASE 3 -Failed Five Wave Pattern - Double Top
DOUBLE TOP
3
5
If the Profit Taking Index is
WAVE THREE
LESS than 35, and the market
Initial Strong
still initiates a Fifth Wave Phase,
29
Rally
the potential for a DOUBLE 4
WAVE FOUR
PTI
TOP becomes very high. Retracement




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Adding Wave Four Channels
Wave Four Channels are another proprietary study developed along with the Profit Taking
Index. The Profit Taking Index mainly deals with Buying/Selling momentum at different
stages. The Wave Four Channels deal with time. After a strong rally, the retracement phase
is allowed a certain amount of time prior to initiating the 2nd attempt (Wave Five) Phase.
Statistical studies show that if the retracement phase consumes too much time, the 2nd
attempt phase diminishes its full effect. The Wave Four Channels are three time/price lines.
If the Wave Four Retracement holds above the Wave Four channels, the odds for a
strong 2nd attempt are greater.
If the Wave Four Retracement breaks below the Wave Four channels, the odds for
a strong 2nd attempt is very low.


WAVE FIVE - 2nd
5
attempt in the same
direction.



3
PTI Greater
59 than 35
WAVE THREE
4
Initial Strong
ch 1
PTI
Rally
ch 2
ch 3
WAVE FOUR
Channels WAVE FOUR
Retracement holding above
Wave Four Channels

The Significance of Wave Four Channels
1) If the wave four retracement holds above the first channel (displayed in BLUE), the
statistical odds are better than 80% for a strong wave five rally.

2) If the wave four retracement holds above the second channel (displayed in GREEN),
the statistical odds for a strong wave five rally is only 60%.

3) The third channel (displayed in RED) is a final stop, because once this channel is
broken the odds for a new high in wave five is very low. The very few times a fifth
wave is generated after breaking the RED channel, the rally becomes a tedious, slow
and drawn out process which literally eats out your patience and option premiums.

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Profit Taking Index & Wave 4 Channels

¤ In Chart A, when the Elliott Oscillator pulls back to zero, the Profit Taking Index
(PTI) should be greater than 35. In this case the PTI is at 47 which indicates normal
profit taking in the Wave Four Decline.




PTI > 35
Chart A
Chart B




±
±
Buy For New
Highs
Prices Holding Above
the 2nd Wave 4 Channel




¤ In addition, the prices should hold above the Wave Four Channels which indicate the
ideal length of time for normal profit taking. In Chart A, the prices are holding above
the Wave Four Channels.

¤ Everything here looks good for a buy.



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Adding Displaced Moving Average (DMA)


¤ We introduced the DMA concept in 1988. The DMA is a normal moving average
shifted to the right. The purpose behind the DMA is to allow the market to continue
its momentum.

¤ When the market finally completes a Five Wave sequence, prices will cross the DMA.




Sell on cross
DMA of DMA
Fifth Wave High°
·




µ
7 Period MA
displaced 5
periods

±
DMA stays out of the way and lets the
market continue its momentum




¤ At the end of Wave Five, use the DMA to enter the trade. We suggest a 7 period
moving average shifted (displaced) to the right by five periods.

¤ WARNING: The DMA is designed to enter positions at the end of a Fifth Wave and
on certain patterns at the end of Wave Four. DO NOT USE the DMA as a tool to buy
or sell at other places. The accuracy for the DMA as a tool by itself is less than 21%.



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Elliott Wave Rules & Guidelines ”
1.) WAVE 3 IS NEVER THE SHORTEST (RULE).

This means that Wave 3 is always longer than at least one of
the other two waves (Waves 1 or 2). Usually, Wave 3 is
longer than both these waves.
Wave 3
You should never look for Wave 3 to be shorter than both
Is Never The
the other two waves. At times, Wave 3 may end up to be Shortest Wave
equal in length, but never the shortest. There is no exception
to this rule.

2.) WAVE 4 SHOULD NOT OVERLAP WAVE 1 (RULE/GUIDELINE).

This means the end of Wave 4 should not trade below the peak of Wave 1. This rule cannot be
violated in Cash Markets. In the Futures Markets, a 10% to 15% overlap can be allowed.
However, use an overlap count as a last resort.

5 5
3
3




1
NO OVERLAP 4
1
OVERLAP

4
2
2
INCORRECT
CORRECT




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Elliott Wave Corrections
Corrections are very hard to master. Most Elliott Traders make money during an impulse pattern and
then loose it back during the corrective phase.

An impulse pattern consists of five waves. The corrective pattern consists of 3 waves, with the excep-
tion of a triangle. An Impulse pattern is always followed by a Corrective pattern. Corrective patterns
can be grouped into two different categories: 1) simple correction 2) complex correction.

Simple Corrections

There is only one pattern in a simple correction. This pattern is called a
Zig-Zag correction. A Zig-Zag correction is a three wave pattern where the 5
B
Wave B does not retrace more than 75% of wave A. Wave C will make
new lows below the end of Wave A. The Wave A of a Zig-Zag correc- 3

tion always has a five wave pattern. In the other two types of correc- A

tions (Flat and Irregular), the Wave A has a three wave pattern. 4
C
1
Thus, if you can identify a five wave pattern inside Wave A of
any correction, you can then expect the correction to turn out as a Simple
2
Zig-Zag formation. (Zig Zag)


Fibonacci Ratios Inside A ZigZag Correction

Wave B = usually 50% of Wave A. B
Wave B should not exceed 75% of Wave A.

Wave C = either 1 x Wave A
A
or 1.62 x Wave A
or 2.62 x Wave A
C
not to scale




Be alert for angle divergence




A simple correction
is commonly called
a Zig-Zag correction.

You typically see
divergence with the
Oscillator in a
simple correction.




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Complex Corrections” Flat, Irregular, Triangle
The complex correction group consists of three different patterns: 1) Flat, 2) Irregular, and 3) Triangle.


FLAT
Flat Correction b

In a Flat correction, the length of each wave is identi-
cal. After a five wave impulse pattern, the market
drops in Wave A. It then rallies in a Wave B to
the previous high. Finally, the market drops one c
a
last time in Wave C to the previous Wave A low.




B B
5
5


3
3


C
4 A 4
1
A C
1

2
2




2

2 1

C
A
1
4

C 3
4 A

3

5 B
5 B




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