Do you have problems with recognizing and analyzing wave patterns?
Most traders struggle to effectively use wave analysis for improving their trades. The Elliott Wave theory might sound logical on paper but remains difficult to use for actual trading purposes.
This article explains how traders can apply four different techniques for analysing and trading the wave patterns on the charts, regardless of the financial instrument.
These four tools are: moving averages, Fibonacci sequences, Awesome Oscillator and “momentum candles”.
100 Wave Traders with 100 Forecasts
Many traders get lost when they apply wave analysis because they get overwhelmed by the number of possibilities.
You can ask 100 wave traders for their wave analysis and you could get 100 different variations. Although this might be a bit exaggerated, it does prove the point that wave traders face a (too) wide range of options.
Is there a tool that can help traders identify the swings and waves?
Luckily, the answer is yes! We use 4 of them.
Tool 1: Understand Waves via Moving Averages
The moving averages (MAs) are the best tool for understanding waves and are a key factor for understanding the wave structure.
Many wave traders do not realise how important the MAs are for determining the most likely wave count…
I use the EMAs (exponential moving average): 21 ema high and low, 144 ema close, 544 ema close and 20 HMA.
The is fully based and focused on MA’s for understanding wave patterns. We use multiple aspects but these 2 are key:
- Position of price versus moving averages
- Moving average versus moving averages
Let’s start with price action versus the 21 ema:
- When price (candle high or low) is not hitting the 21 ema high or low, price is in a momentum and impulsive price action.
- When price is hitting the 21 ema high or low 21 ema zone, price is in a range or retracement.
How will this simple fact help us?
If you see that price is not hitting the 21 ema and therefore price is in a momentum, then you know that price is in an impulsive wave such as a wave 1/3/5 or wave A or C.
If you see that price is hitting the 21 ema and therefore price is in a correction or range, then you know that price is in a corrective wave such as a wave 2/4 or wave B.
Now compare the previous chart to the chart below. Do you think that the wave patterns are easier to determine when using MA’s compared to a blank chart?
The ecs.SWAT method not only uses the 21 ema zone, but also the 144 ema close, 544 ema close and 20 HMA. Here is a summary:
- Price is moving away from both 144 and 544 ema close → indicates full trend such as wave 3 or 5 in most cases.
- Price is moving back to the moving averages → indicates a larger retracement or reversal such as a wave C or complex correction or start of a new trend via a wave 1.
- The HMA indicates whether the immediate momentum is up or down.
It also compares MAs versus MAs:
- 21 ema zone above 144 ema above 544 ema is full uptrend.
- 21 ema zone below 144 ema below 544 ema is full downtrend.
As you can imagine, traders can assess the chart and wave analysis with more precision and accuracy when using these tools.
It’s not a guessing game anymore, but rather a careful examination of MA’s. The image below shows the moving averages provide and add context to each chart.
Tool 2: Use Momentum Candles
Candlestick patterns provide key information but they sometimes can make traders insecure. Do you exit a setup when you see a reversal pattern or do you stay in because of the strong momentum?
Our ECS wave method uses ecs.SWAT candles to simplify that decision making. The simplicity of using simple red, blue and grey colors for understanding momentum or correction removes the guessing from our decisions.
Here is a simple and quick explanation:
- Red candle = bearish momentum
- Blue candle = bullish momentum
- Grey candle = indecision and correction
You can use the ecs.SWAT candles in combination with the moving averages. This will provide you with a full 360 degree view of the market structure and potential wave patterns.
These momentum candles are not only useful for understanding wave patterns but also for trading purposes (entries). Red and blue candles indicate clear potential setups on that time frame or lower, especially when a first red or blue candle appear (although more checks are needed before actually entering a setup).
In the chart below you can see a few potential entries based on ecs.SWAT candles.
Tool 3: Use the AO for Determining Swings and Waves
Our next method is also a simple tactic: determining the wave count based on the Awesome Oscillator (AO) bars.
The AO bars will help you understand two key factors:
- What is considered one price swing.
- What are the potential wave patterns of those price swings.
One price swing: traders can understand how to read price swings on a chart by comparing the AO bars with the middle point of the AO (zero line). One price swing occurs when the AO bar moves away from the middle line and then back return back to that middle line.
Wave patterns: the waves tend to follow the AO bars. Here are the main conclusions:
- Wave 3 almost always has the biggest push away from the zero line.
- A wave 5 will see AO bars that cannot break beyond the top or bottom of wave 3, which creates divergence.
- A wave 2 and 4 as well as waves ABC will see AO bars that fully go back to the zero line to complete the retracement.
Tool 4: Use Wizz Levels (Fibonacci Sequence in Pips)
Our ecs.WIZZ tool is a simple yet highly efficient method for knowing when to expect momentum – quick one directional price action. The Wizz tool is great in spotting impulsive price action pre-fact.
When price moves a certain number of pips away from the average, then traders can expect impulsive price action. This is not a guarantee but it does provide a high probability.
The key number of pips for a 1 and 4 hour chart are as follows:
- 144 pips → wizz level 3
- 233 pips → wizz level 4
- 377 pips → wizz level 5
- 610 pips → wizz level 6
The key wizz levels will differ from time frame to time frame. On a 15 min charts, the key number of pips will be less whereas on a higher time frame it will be more pips.
The beauty of using the wizz tool is that you understand where you can expect larger momentum to take place (see image above):
- Between wizz level 3 and 4
- Between wizz level 4 and 5
- Between wizz level 5 and 6
There are two main advantages:
- You have key targets based on Fib levels.
- You know when you can let your winners run and aim for a bigger win (when price breaks wizz levels 3, 4 and/or 5.
Above all, enjoy riding the waves!
Wish you good trading,