The Elliott wave theory is a very broad topic that takes years to fully understand and master before you can be regarded as a professional Elliott wave trader. Most of us do not have the luxury of devoting so much time to mastering one trading style, which is why many traders choose to avoid the subject in its entirety. However, it is still possible to use elements of this theory in your trades without taking the time to become an expert.
Here is a look at one important aspect of the Elliott wave theory that you can easily master and incorporate into your current trading plan.
What are impulsive waves?
The best Elliott waves to trade are impulsive (motive) waves. These are usually aligned with the existing trend and last for long periods, unlike corrective waves.
Image 1: Illustration of Elliott wave theory
The image above shows how Elliott waves occur in a bullish trend where waves 1, 3 and 5 are impulse waves as they occur in the direction of the trend.
In contrast, waves A and C represent impulse waves in the downtrend that appears after the uptrend is exhausted at the end of wave 5. The Elliott wave theory is reversed when the price is in a sustained downtrend as the first five waves now become the motive waves, while the last three are now the corrective waves.
How to trade the impulsive Elliott waves
The guiding principle when trading the impulse waves is to buy on the pullbacks or corrective waves that occur within a trend, such as waves 2 and 4 during the impulsive wave phase. Keep in mind that none of the pullbacks should retrace over two-thirds of the impulsive move that preceded the corrective move.
Chart 1: Elliott waves on the EUR/GBP 4-hr chart
The EUR/GBP 4-hour chart above is an excellent example of the inverted Elliott wave structure as the chart starts in a strong downtrend before reversing and heading higher to complete the Elliott wave pattern.
You can see that the impulsive (emotive) waves that are aligned with the trend are much bigger than the corrective waves and present excellent profit opportunities for the discerning trader.
Chart 2: EUR/GBP 4-hr chart with Elliott wave trade setups
By focusing on trading based solely on the emotive moves in the Elliott wave pattern plotted above, you would have profited from the majority of the trend in the EUR/GBP 4-hr chart above.
How to get better trade entries
The key to getting the best trade entry locations when using the Elliott wave strategy is only taking trades when the price is in a corrective wave. For example, the EUR/GBP chart shows that the best trade entry locations occurred at the end of the corrective wave, where price spiked higher and then fell quickly.
Each of the trade entry locations marked by an arrow in the EUR/GBP chart shows a point where price spiked above or below the 20-period MA (red) line, then quickly proceeded in the expected direction. We chose these points randomly because we believed that they represented the best trade entry opportunities before realising what they had in common when we analysed the chart much later.
A word of caution
Some traders swear by the effectiveness of Elliott wave theory is picking the best trade entry location and predicting the future direction of a particular asset’s price, but this is not always the case. The Elliott wave theory is a complicated concept with a lot of tiny nuances that can take many years to understand fully. However, by mastering the concept of impulsive and corrective waves, you can shortcut the learning process.
The bottom line
The bottom line is that trading impulsive moves is an effective way to use the Elliott wave theory as a key part of your trading strategy. You can focus on trading impulsive Elliott waves to maximise your trading profits, and the good news is that this simple strategy can be used even by beginner traders. Combining impulsive moves with other indicators, such as the 20-period moving average, can help you get better trade entries and maximise your profits.