TradingKey PDF

Copyright © 2010 HUBB (Australia) Pty Ltd
All rights reserved.

Information in this document is subject to change without notice. No part of this
publication may be reproduced, stored in a retrieval system or transmitted in any
form or any means electronic or mechanical, including photocopying and recording
for any purposes other than the purchaser‟s personal use, without the written
permission of HUBB (Australia) Pty Ltd.
HUBB (Australia) Pty Ltd
ACN 080 285 801
Unit 5, 4 Skyline Place
Frenchs Forest NSW Australia 2086
The TradingKey is published by Hubb (Australia) Pty Ltd ACN 080 285 801
(HUBB). Before making any investment decision based on analysis performed
using The TradingKey, an investor should consider, with or without the assistance
of a licensed advisor, whether that decision is appropriate in relation to their
specific financial situation, goals or needs. In providing this information HUBB has
not taken into account the investment objectives, financial situation or specific
needs of any individual investor. Before making an investment decision on the
basis of any analysis performed using TradingKey, an investor should consider,
with or without the assistance of a licensed advisor, whether or not the investment
decision meets the objectives and financial circumstances of that investor.
For Australian Residents This information is provided by HUBB an Authorised

Representative of Investment Educators Australia Pty Ltd the holder of an
Australian Financial Services Licence No 241060 and this information is provided
in accordance with the conditions of that licence.
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Deviation Channel Breakout .....................................................................48
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EW4 Sell Trade .........................................................................................................95
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Figure 1 – Market Movements 17
Figure 2 - R. N. Elliott 18
Figure 3 Bullish and Bearish Elliott Wave Patterns 19
Figure 4 Corrective Wave example 20
Figure 5 Typical Elliott Wave formation 21
Figure 6 Elliott Waves within Elliott Waves 21
Figure 7 Trend Sympathy 22
Figure 8 IBM – Daily Bar – 5/35 Moving Average and Oscillator Indicators 25
Figure 9 Fibonacci examples in Nature 26
Figure 10 Fibonacci examples in the human body 27
Figure 11 DJ 30 – Fibonacci Retracement Tool applied from 1987 low to 2007 High 28
Figure 12 Fibonacci in Time 29
Figure 13 Ratios for Wave 2 30
Figure 17 Phelps Dodge Corp – Daily Bar – Three Elliott Wave components 34
Figure 18 Corrective Waves 35
Figure 19 Complex Corrective Patterns 36
Figure 20 Long Range Counts 37
Figure 21 Statistical TAPPS settings in ProfitSource 38
Figure 22 Statistical TAPPS settings in ProfitSource 39
Figure 23 Alternate TAPPS settings for Time and Price Calculations in ProfitSource 39
Figure 24 Exxon Mobil – Daily Bar – Example of Statistical Probability display in ProfitSource 40
Figure 25 NASDAQ 100 – Daily Bar – Statistical TAPPs (Wave 4 and Wave 5) 41
Figure 26 ProfitSource‟s Technical Drawing Tools palette 42
Figure 27 eBay Inc – Daily Bar – Using the Range Projection tool 43
Figure 28 eBay Inc – Daily Bar – Applying the Range Projection tool 44
Figure 29 Close-up of the Range Projection tool display 45
Figure 30 Range Projection Settings dialog in ProfitSource 45
Figure 31 Trading Elliott Wave 4 47
Figure 32 Phelps Dodge – Daily Bar – EBOT Entry Triggers 48
Figure 34 Prudential – Daily Bar – Range Projection Channel settings 50
Figure 36 Prudential – Daily Bar – Standard Deviation Channel deviation settings 51
Figure 37 GUD Holdings – Daily Bar – Stop Loss level set beneath Wave 4 low 52
Figure 38 GUD Holdings – Daily Bar – Stop Loss level set beneath Wave 4 low 54
Figure 39 GUD Holdings – Daily Bar – Trailing stop triggered 55
Figure 40 Simple Elliott Wave 5 57
Figure 41 Phelps Dodge Corp – Daily Bar – Elliott Breakout Trigger example 58
Figure 42 Hi-Lites palette in ProfitSource 59
Figure 43 DJIA – Daily Bar – Example of New High Hi-Lite tool 59
Figure 44 DJIA – Daily Bar – New High and New Low Hi-Lites applied 60
Figure 45 Disney Inc – Daily Bar – Use of New High Hi-Lite with EW5 EBOT indicator 61
Figure 46 Indicators palette in ProfitSource 62
Figure 47 Swing Indicator Properties settings dialog in ProfitSource 62
Figure 48 Kellogg – Daily Bar – 2 Period Time Swing Indicator 63
Figure 49 FTSE 350 – Daily Bar – Oscillator example 66
Figure 50 BHP Billiton – Daily Bar – 12,26 Exponential MA and 12,26,9 MACD 67
Figure 51 MacQuarie Group – Daily Bar – Example of converging MACD signal 68
Figure 52 MacQuarie Group – Daily Bar – MACD signal confirmed 69
Figure 53 Commonwealth Bank – Daily Bar – Example of converging MACD signal 70
Figure 54 IBM – Daily Bar – Example of MACD default settings 71
Figure 55 MACD Properties settings dialog, Parameters tabbed page 71
Figure 56 Swing Indicator Properties settings dialog, Plots tabbed page 72
Figure 57 MACD Properties settings dialog, Plots tabbed page, MACD Line selected 72
Figure 58 MACD Properties settings dialog, Plots tabbed page, MACD Histogram selected 73
Figure 59 RSCH In Motion – Daily Bar – MACD confirming EW5 74
Figure 60 General Motors – Weekly Bar – MACD confirmation of Bearish trend 75
Figure 61 Whole Foods Market Inc – Daily Bar – Bollinger Bands example 76
Figure 62 MOGN – Daily Bar – Bollinger Band example of Bounce 77
Figure 63 Exxon – Daily Bar – Example of the On Balance Volume (OBV) indicator 79
Figure 64 Telstra – Daily Bar – OBV confirming Bollinger Band tags (Short) 80
Figure 65 QWEST Coms – Daily Bar – OBV confirming Bollinger Band tags (Long) 80
Figure 66 Fidelity National – Daily Bar – OBV Confirms Wave 4 Trade 82
Figure 67 Microsoft – Daily Bar – IV 7 to 30 Days plotted 86
Figure 68 Ascending Triangle pattern 89
Figure 69 Descending Triangle pattern 90
Figure 71 New High Settings dialog in ProfitSource 92
Figure 72 Phelps Dodge Corp – Daily Bar – Oscillator confirming Elliott Wave 93
Figure 73 EW4 Buy 94
Figure 74 EW4 Sell 95
Figure 75 EW5 Buy 96
Figure 76 EW5 Sell 97
Figure 77 3M Co – Daily Bar – Support Lines 103
Figure 78 IAG Daily – Horizontal Resistance Level 105
Figure 79 Return Line/Trend Line Anomaly 106
Figure 80 CBA – Daily Bar Chart – Range Trading Example 107
Figure 81 iShares HK ETF – Daily Bar – Elliot Wave Support Lines 108
Figure 82 iShares HK ETF – Daily Bar – Downward Channel in Wave 4 109
Figure 83 AGL Energy – Daily Bar – Breakaway Gap example 110
Figure 84 QBE Insurance – Daily Bar – Runaway Gap example 110
Figure 85 Foster‟s Group – Daily Bar – Exhaustion Gap example 111
Figure 86 BHP Billiton – Daily Bar – Head and Shoulders example 114
Figure 87 Elliott Wave Patternin Head and Shoulders 115
Figure 88 Five data-types of each Bar 116
Figure 89 Analysing the Open to Close relationship 117
Figure 90 Analysing the Open to High/Low relationship 118
Figure 91 Analysing Reversal Patterns 119
Figure 92 Bar Analysis with Elliott Wave 120
“Formal education will make you a living; self-education will make you a
fortune”
- Jim Rohn, author and entrepreneur
Trading is an easy business to get into, but it is notoriously hard to master. When I
established the HUBB Financial Group some 15 years ago, my goal was to
provide the best possible tools to assist traders and investors in making better
decisions. With direction and constant feedback from some very successful
traders in the United States, we embarked on the ambitious task of creating a
software suite that incorporates all elements of trading – the result is our
integrated investor series. For novices and long-term investors, ValueGain is the
perfect platform to support fundamental decision making. For those looking to
really maximise the probability of successful stock picking, we devised
IntegratedInvestor.
The ‟Key‟ series of online courses was put together to describe specific trading
and investment strategies that are complemented by the tools found each of these
software programs. Most of our clients start with the DividendKey which is all
about long-term investing and wealth accumulation; however for those of a more
active persuasion, ProfitSource and the TradingKey methodology is the perfect
solution.
In writing this course we were influenced by the feedback and experience of all
our top trading contributors. Their broad understanding and technical analysis
„savvy‟ is evident throughout the pages and online material, however this did pose
a problem. In the real the world, often valuable lessons are not learned in any
apparent orderly sequence, it is rather the accumulation of experience that results
in wisdom. Consequently it can be difficult to present this knowledge in a
straightforward, logical series of steps. Often, we were confronted with a bit of a
“chicken or the egg” paradox. Do we dive straight into Elliott Wave without talking
about the extremely important basics of technical analysis (TA), or do we cover TA
first and then later revisit it when talking about Elliott Wave? After much thoughtful
deliberation we decided to do both! Basic TA is covered in our addendum whereas
more complex concepts are shown throughout the pages of the actual course. we
constantly apply these principles to Elliott Wave in the “Elliott Wave Interludes”,
which you can find beneath each of the technical analysis techniques mentioned.
Our learning approach is designed to get you thinking about how to apply your
knowledge into the real world and, has the additional bonus of acting as a quick
and relevant reference guide for your trading activities, well into the future.
John-Paul Drysdale
John-Paul Drysdale
Managing Director HUBB
“An investment in knowledge always pays the best interest.”
- Dr. Albert Schweitzer, philosopher
The TradingKey is a program that aims to equip you with the knowledge and skills
to start trading financial instruments to produce additional income for you and your
family. As a student of the TradingKey Program, you will receive:
1. Workbook and course materials
This workbook contains detailed notes on all the concepts covered in the
course and will be an invaluable reference source as you progress on your
trading journey. The workbook also contains various trading plan
templates which will specify what you should look for before opening a
position and also serve as a method of recording your trading.
2. Online Lessons
The TradingKey course itself is composed of 4 online and interactive

webinars which are delivered over 4 weeks. In order to view these you
simply need internet access and log-in details (which will be provided to
you prior to the event). If you miss any of these, you can watch a recording
of the course at any stage during the month.
Curriculum
Session 1 Week 1 Understanding Elliott Wave and Technical Analysis
Session 2 Week 2 Elliott Continuation Trades
Session 3 Week 3 Elliott Reversal Trades
Session 4 Week 4 Picking Better Trades
The introductory section of this Workbook aims to establish the basics of Elliott
Wave Theory and some easily identifiable and readily used technical analysis
patterns. Although we will be covering the salient points during the course, you
will find that there is more detail contained in these actual pages. We‟ve done this
for two chief reasons; firstly you may already have some experience in basic
technical analysis and secondly because the information can act as a constant
reference companion throughout your trading career.
As you progress through the notes and presentations you will notice various
checklists; what we consider to be important considerations before taking a trade.
These are intended to highlight key messages and should be considered crucial to
the learning process. Full and more detailed checklists will be shared by the
course presenter in the webinars, so make sure you take full advantage of the live
and recorded sessions.
Finally, if it feels like there is a lot of work - don‟t worry! We are here to help and
will provide you with all the support you need. Throughout the lessons, all of the
concepts will be discussed in detail, and you are able to ask questions at any time.
The TradingKey course will explain and demonstrate concepts in a straightforward

and easy to understand manner, and at HUBB we are confident that you will be
ready to embark on a very rewarding trading journey after just 30 days. Trading
requires a degree of commitment in terms of both time and effort and you should
start developing the habits of all successful traders. Be disciplined in your
approach, monitor all your open positions and ensure you have a good grasp on
the trends of the major global indices and commodities.
The good news is that although some effort will be required on your part, the
technical analysis and Elliott Wave functions in your ProfitSource are all very
much in line with the TradingKey methodologies. The strategies covered in the
course are perfectly complimented by the tools and algorithms contained in the
software and have all been designed by some of the premier traders in the United
States.
The principles in the TradingKey really can change your life. By planning to build
an income from your active trading you can free yourself from the burden of
financial worry that faces so many, but this has to come as part of a concerted and
multi pronged financial plan. Remember that trading is an income generating
exercise (like any vocation) and should only be pursued with “risk capital”; that
amount of your wealth you are comfortable with potentially losing. For your initial
wealth creation and the first steps of investing, we would recommend longer term
and lower risk strategies found in our DividendKey course.
At HUBB we believe that the best investment you can make is in knowledge. We
believe that no one has more interest in your financial future than you do, and as
such you alone are the best possible person to manage your wealth.
Financial education really is the new advice, and we believe that anyone has the
ability to achieve attractive investment returns. In fact, given the poor track record
of many professionally managed funds (not to mention costs) we believe that with
the right education most people will be able to outperform the industry average.
It‟s our goal to help you achieve this task.
HUBB offers quality education across a wide range of financial topics and
provides investors with the tools needed to make analysis easy. We have been
empowering retail investors for over 10 years and our philosophy and strategies
can be easily put into practice. Give it a try!
The Wealth Triangle brings together the HUBB AAA Strategy and represents a simple
way you can begin the process of building wealth. Composed of the three key
aspects of Accumulate, Allocate and Accelerate, the Wealth Triangle combines
these to create a practical investment framework.
It‟s a neat and easy way to prompt some important questions about your
investment plans. First up, where do I get my investment capital, how and where
do I invest once I‟ve got some capital and how can I enhance my returns?
The AAA strategy and Wealth Triangle are perfectly scalable and the concepts
can be used to address the different goals of wealth creation from long term
investing all the way to short term speculation. For a more detailed examination of
how to set up long term investing, just refer to your DividendKey manual.
How you decide to integrate your trading goals and your long term wealth plan is a
matter of personal taste, although you will definitely want to consider things like
tax implications, investment maturities and time horizons in the final decision.
Short term income from your trading could, for example, constitute around 20% of
your entire wealth as it will usually be subject to more aggressive taxation. The
majority of money can therefore be put into longer term and more tax efficient
investment assets and in some cases even generate tax credits which can be
used to offset tax liabilities (from trading). Of course, profits from your trading can
be recycled into the longer term „Accumulation‟ phase, expediting your financial
aspirations and goals.
“Empty pockets never held anyone back. Only empty heads and empty
hearts”
- Norman Vincent Peale
Before you can start trading you need to save up some money first! Remember,
trading capital is risk capital. You should never risk more than you can afford to
lose.
Prepare a budget and savings plan as soon as you can. Then, and only then, you
can focus on the much more interesting and exciting business of boosting your
rate of return…
This is really the main focus of the TradingKey program. The majority of traders
fail because of the haphazard and ill disciplined approach to their trading
business. Indeed, many readers will have gravitated towards the TradingKey
because the previous approaches they‟ve employed were not working.
Conversely, those individuals who are armed with a specific trading plan and
combine that with a select array of tools are more likely to build a regular income
from the financial markets. This is where we can help with specific checklists and
criteria that need to be met before taking a trade
Allocation is all about picking trades that are most likely to yield the greatest return
within a reasonable period of time. These time frames can vary from days to
weeks although will not be based around intraday techniques. The focus of the
TradingKey is on position trading. Elliott Wave within your ProfitSource will be the
main method of selecting trades, although we will also look at confirmation from a
diverse group of indicators which can be used in conjunction or even in isolation.
The Allocation phase is detailed in all sections with specific reference to their
application in Elliott Wave via our “Elliott Interludes”.
This last phase is all about helping you boost your trading returns in a safe
fashion. This is achieved through the use of leverage, and while this does involve
additional risk, the TradingKey shows you how you can effectively manage this, by
using initial stop loss and trailing stop loss strategies.
In the day and age of online broking and more sophisticated retail traders, there
has been a huge influx in the different leveraged financial instruments available to
trade. The type and style of instrument you trade is very much likely to depend
upon your geographical location and with a diverse group of traders benefiting
from HUBB‟s courses around the world, we‟ve chosen not to go into any one
specifically. Popular across the entire world are the commodity and financial
futures markets. In the United States of America, chances are you will be looking
to trade equity or index options or possibly one of the leveraged ETFs that are
available. For Europe, Canada, Asia and Australia you will most likely seek
leverage by using Contracts For Difference (CFDs). Regardless of this, the
lessons you will learn in the allocation stages of the TradingKey are all equally
applicable.
By building a short term income generating machine with the assistance of the
TradingKey methodology, your trading will maximise the input to the longer term
and more efficient wealth creation triangle. Building this „right‟ does require
discipline and planning and a little effort on your behalf. Not only that, but we
would respectfully recommend you consider the DividendKey as an excellent
building block helping you get all the elements of our triangle working for you!
The principles outlined in the TradingKey really can change your life. By planning
to build an income from active trading, you can free yourself from the burden of
financial worry that faces so many in society today, but this has to come as part of
a concerted and multi-faceted financial plan. Remember that trading is an income
generating exercise (like any vocation) and should only be pursued with “risk
capital”: meaning that amount of your wealth that you are comfortable with
potentially losing. For your initial wealth creation, and for many of your first steps
of investing, we would the recommend longer-term and lower-risk strategies found
in our DividendKey course. Now with the plan in place, let‟s get started with the
main reason for doing the TradingKey – making money using Elliott Wave.
Elliott Wave Theory is the method for explaining the movement of financial
markets including stocks, futures and foreign exchange. In really simplistic terms,
Elliott Wave Theory suggests that markets do not simply go up or down in a
straight line. It suggests that during any significant movement in the market,
regardless of whether it‟s up or down, there is a cycle or series of phases that
occur. These patterns of market action and market reaction look like a series of
smaller up and down movements that happen all the time during the overall,
bigger picture up or down trend.
Figure 1 – Market Movements
Generally once these phases or “waves” as Elliott Theory terms them, are
complete, then the trend may be over and the market is ready to change direction.
If we can learn to identify these waves as they are occurring then we can start to
identify in advance where and when the market might next be ready to change
trend. This is all we are trying to do. Elliott Wave theory can be made very
complicated if you don‟t keep sight of this simple objective... so to begin with, let‟s
make a commitment to keep it as simple as possible.
Elliott Wave Theory is a style of technical analysis. The TradingKey assumes a

basic understanding of technical analysis. For those that need a refresher,
technical analysis is the study of past volume and price movements in order to
predict future ones. The crux of this style of analysis is to look for trends, reversals
in trends and other chart patterns in order to understand what the investing
masses are doing. Once a trend has been identified, for example, a trader will
then follow that market until the trend stops or reverses. Unlike fundamental
analysts, technical analysts use charts as their predominant tool. A chart
represents a snapshot of market action and (just like a photograph) can provide a
huge amount of information from the very small scale, all the way to the bigger
picture.
Because of the nature of price and volume it is easy to compare historical figures
to the present. This has allowed technical analysts to build a wide array of
statistical models (called indicators) designed to understand current market
conditions and help predict future ones. These indicators range from the simple,
such as a moving average, to the more complicated, such as a MACD. As you‟ll
discover during this course and in any technical analysis text, there are hundreds
of technical analysis indicators to choose from. Many traders suffer from “analysis
paralysis”, becoming so inundated with indicators and looking for the “perfect
trade” yet never taking one. Our focus is on using indicators that compliment Elliott
Wave and can act as a filter to help picking the right trades. Indeed, our complete
regard of technical analysis revolves around using the traditional patterns, basic
market geometry and signal days in order to pick better Elliott wave trades.
“Elliott Wave analysis should be practiced with an understanding of TA”
If you need more background on technical analysis, just use the addendum
attached to this course. Within those pages you will see that we‟ve presented a
comprehensive look at the most common chart patterns, however, rather than just
supply reams of generic examples, we‟ve commented on these patterns in a
practical fashion from an Elliott Wave perspective. If you feel you are comfortable
with the patterns, simply refer to these “Elliott Interludes” to see how you can fit
them into your analysis.
Ralph Nelson Elliott was born in 1871 in Marysville, Kansas. As a professional he

moved into the field of accounting and was primarily employed in executive
positions amongst the top railroad companies of the time. In 1920, Elliott‟s life
changes when he was hired by the US Department of
State to assist in the financial reorganisation of Nicaragua.
It was during this assignment that he contracted an illness
that forced him into early retirement and concentrated his
keen analytical mind to the study of the stock markets.
After studying 75 years worth of data of stock market

indices (including yearly, monthly, weekly, daily, hourly,
and even half-hourly charts), Elliot published his third book
Figure 2 - R. N. Elliott (in collaboration with Charles J. Collins) called The Wave
Principle (in August 1938). In it, Elliott advocated that,
although stock market trends may appear random and unpredictable, they actually
follow predictable natural laws. With knowledge of these laws price action and
reaction can be measured and forecasts created. Following the publication of The
Wave Principle, Elliot was asked to write 12 articles for Financial World magazine
in which he would describe his new system for analysing market trends and come
to increasing fame amongst certain stock brokers and their client bases.
In his book and articles, Elliott observed that stock markets move in a series of
rhythmic patterns which are associated to a natural progression of shifts based on
mass investor psychology. As market participants vacillate between greed and
fear, price patterns develop. He called these price patterns "waves”.
Elliott discovered that there were two basic types of wave patterns:
Impulse Waves consisting of five waves, which collectively move in the direction of
the main trend of the market.
Figure 3 Bullish and Bearish Elliott Wave Patterns
Corrective Waves consisting of three smaller waves which follow the impulse
wave series and move counter to the market's main direction.
After the Impulse Wave, a pattern of correction in the opposite direction from the
impulse wave occurs. This corrective phase is characterised by a three-wave
pattern.
Figure 4 Corrective Wave example
Again, rules regarding the relationships between the volume, momentum and
oscillation characteristics of these waves provide the basis for their identification
as correction waves by the software.
The ends of these corrective waves are identified by the letters ABC on the price
chart. They in turn, will set the stage for the next group of Impulse waves.
The Elliott Wave pattern can best be explained by considering the activity behind
the waves themselves – who is causing them and why. The two major players are
institutional investors and retail investors. Of course Institutional investors (e.g.
mutual funds) have very large buying power and comprise the bulk of the activity
in the market. The retail investor impacts the market less significantly than the
institutional investor. How these two groups of investors interact in various parts of
the five wave cycle is described below for a bullish market. This interaction works
in bearish markets using reverse logic.
Wave 1 is generally considered to be the “short covering” wave. A bout of short

covering (profit-taking for short sellers) turns a trending stock in the opposite
direction. This influx of buying incites a bounce in the opposite direction.
Once the buying subsides, Wave 2 begins with a very strong round of selling (or
buying for bearish pattern), however the selling is not enough to bring the stock to
the beginning of Wave 1, forming a higher low.
Wave 3 begins with another round of buying. Wave 3 will often find resistance at
the high of Wave 1, where stops will tend to accumulate. Gaps above Wave 3 are
an indication that a large number of stops have been taken out and signal that a
strong Wave 3 is underway. Wave 3 is often called the “Institutional Wave” and is
driven by large investors. It is most often the longest and strongest wave in terms
of price movement and time.
The retail investor is typically not aware of this rally until an orderly profit-taking
rally takes place – Wave 4. As Wave 4 is formed, retail investors become aware
of the stock and join in on the buying. Of course, retail investors make up only a
small portion of the market and lack the influence of institutional investors.
Wave 5 begins when new highs are set, but on less momentum (pressure). The
end of the trend is near.
Figure 5 Typical Elliott Wave formation
Elliott further discovered that each wave, whether impulsive or corrective,

subdivides into smaller waves and/or comprises a part of a larger wave.
This allows waves to be analysed in time periods ranging from a matter of minutes
to many centuries.
Figure 6 Elliott Waves within Elliott Waves

These „waves within waves‟ are an important consideration for the Elliott trader
and are often termed, “fractals”. Fractals occur regularly in nature and are most
commonly observed in those things that grow or develop, from plants and leaves
through the crystallisation of minerals all the way to blood veins and river basin
systems. In a similar fashion the fractal growth of the market allows an Elliott
Wave trader to observe the short term market action in relation to the longer term
market action, knowing that an existing pattern is part of a bigger overall pattern.
Figure 7 Trend Sympathy
This can be a very important filter. By ensuring that the shorter term daily Elliott
count is in sympathy with the longer range Elliott count, there is tremendous
opportunity to be in a position that is aligned with the primary and secondary
trend.
Quite clearly Elliott Wave, when applied correctly, can be a method for forecasting
upcoming market moves. This puts us one up on traditional technical indicators
which allow us to see what is happening right now but won‟t give us any method to
relate that to probable future movements.
If we can learn to interpret the Elliott Wave pattern on any market then we can
assess whether we think the market will continue to trade in the same direction or
whether it will change trend. We don‟t even need to be correct every time – We
just need to get it right more often than we get it wrong. If we can achieve this, in
combination with a good trading plan, then we can expect to make consistent
trading profits over time. This is what the TradingKey aims to help you create.
Elliott Wave analysis is subjective. Elliott‟s original rules allows for some „grey
areas‟ which require an element of judgement from the analyst. Quite easily,
several different Elliott wave professionals could look at the same chart and
come up with some very different interpretations.
There is no way of knowing as which count is correct. An Elliott count can only
be definitively proven after the fact. The flexible application of rules and the
ability for the market to surprise (we thought we were in a 5, but it just kept
going so it must be a 3, for example) means that the active or current count is
unlikely to be perfect every time.
Consistency is the most important thing for Elliott Wave traders. With so many
potential counts in Elliott Wave analysis, a trader can never know if he or she
is following a system or randomly attributing a market move with a wave label.
By being consistent a trader will therefore always be able to replicate success
and avoid failure.
Elliott Wave analysis is a form of technical analysis, therefore it deals with
probabilities. Statistical testing of historical data and subsequent application of
the optimised systems and procedures allows you to build high probability
outcomes.
Elliott Wave analysis can be applied to any time period for market analysis.
The principles hold true whether you are looking at market movements over
minutes, days , weeks, months and even years. Our focus will be trades that
last over days and weeks but keep in mind that the same principles can be
applied to intraday charts for day traders or long term charts for investors.
Before we go any further there are a number of important things that you should
know about ProfitSource and how it can be used in your trading.
ProfitSource is an amazing time & work saving tool for traders

ProfitSource uses a consistent formula to calculate Elliott Wave counts
ProfitSource is not meant to be a black box that will give you winning trades
every time
ProfitSource will short list a range of potential Elliott Wave trading set ups that
you must analyse to determine whether or not you will trade them. This
course, “The TradingKey”, is designed to give you the knowledge to do that
analysis.
Our Elliott Wave counts are a subset of the total Elliott Wave Theory
Although we have looked at Elliott Wave counts, impulse waves and corrective
wave the examples we‟ve used are very clear and definitive. Of course, the
markets are not that easy to identify all the time and it can become almost
impossible to identify a wave 3 in relation to a wave 5 by looking at the price
action alone. Wave 5 makes new highs, of course, but could it merely be an
extension of Wave 3? The price chart fails, in many respects, to show the
difference in strength of the various waves and this is important to us when it
comes to consistent labelling of the waves.
From Elliott theory we know that Wave 3 is the strongest wave with the most
“breadth”. As such, its internal price structure will be much stronger than Wave 1
or Wave 5. We can regard this in a different fashion, Wave 3 will have more
momentum than Wave 1 or Wave 5. We need a measure of momentum and that‟s
where the oscillator comes into its own.
A price oscillator indicator graphically displays the interaction between two moving
averages: one is a slow moving average and the other a slightly faster moving
average. Generally the shorter the time period of the moving average, the more
responsive that line will be to changes in the prevailing trend. When the time
period used to generate the moving average is longer, the effect of minor price
changes are smoothed out and the line appears more stable. A simple moving
average cross over trading system uses this concept to identify buy and sell
signals as the short-term trend accelerates or decelerates relative to the longer
term trend.
Using an oscillator tool is to plot these crossovers in a graphical fashion gives your
interpretation a distinct advantage. By showing a positive or negative result, an
analyst can quickly determine whether the short-term trend is up or down relative
to the longer term trend. Just as importantly, the power of that trend can be
viewed relative to previous pulses of movement. In other words, the oscillator can
tell you when a wave begins, when it ends and how powerful (how much
momentum) that wave has or had.
The chart below shows a plotted 5 day and a 35 day moving average. Below it is a
5/35 oscillator. By filling in the space between the two moving averages with the
slower line (smoother) acting as the “zero line” and the fast line acting as the
magnitude line, the relationship between the moving averages and the oscillator is
easily seen.
Buying Pressure Selling Pressure
Figure 8 IBM – Daily Bar – 5/35 Moving Average and Oscillator Indicators
Popular moving average settings for the oscillator are 5/17 (short-term), 5/35
(medium term) and 10/70 (long-term, which is often considered an indication of
institutional activity).
Often times the oscillator is loosely referred to as “buying pressure” or “selling

pressure”, with buying pressure extending above the zero line and selling
pressure extending below the zero line.
Fibonacci was an Italian mathematician from the 13th century credited with solving
a puzzle set by the Emperor of the Holy Roman Empire, Frederick II. The problem
involved predicting the reproduction of rabbits from a single pair and resulted in a
series of now famous numbers.
In sequence these numbers are:
1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144
By calculating the ratios between these numbers you get another associated
series which is usually displayed in percentages. If you divide 89 by 144 for
example, you end up with 0.618 or 61.8%. Going the other way and dividing 144
by 89 you get 1.618%. Both these numbers are constants. The other percentages
are either the inverse of this or 61.8% of the distance between the relative
percentages (i.e. 23.6% is 61.8% of 38.2%):
0%, 23.6%, 38.2%, 61.8%, 78.6% and 100%
Although not calculated by the Fibonacci sequence, technical analysts have

adopted 50% as an important retracement level. Anyone who has studied the
work of W.D. Gann will know how important this level is and, as such, we will also
adopt it into our analysis. The Fibonacci sequence and ratios can be observed in
many naturally occurring patterns and is often useful in describing the physiology
of plants and animals, as well as a large number of physical phenomena. In
particular the Fibonacci numbers are evident in structures that „grow‟ or „expand‟
over time, it is this element that makes attracts technical analysts.
The most commonly cited occurrence of the sequence is the nautilus shell;
however the pattern that makes up the structure of events as big as hurricanes all
the way down to seed distribution in pine cones is the same. By using the
Fibonacci spiral shown in the left most image below, it is evident how the
sequence is involved in constructing such a pattern.
Figure 9 Fibonacci examples in Nature
There are plenty of other observations that conform to the Fibonacci sequence.
Some analysts point out how it relates to the human skeleton and relationships
between different bones, whereas others posture that even emotional cycles are
influenced by the sequence.
Figure 10 Fibonacci examples in the human body
Elliott took a large degree of this information (in what he described as “natural
law”) and noted that anything that could describe the physiology and emotional
traits of masses could be used in the stock markets. Forex traders in particular
have grasped the notion of using Fibonacci retracement tools in order to predict
potential resistance or support levels when trading currencies. Of course, it works
equally well in stock and futures analysis and is now a common place tool in all
trading applications.
In order to use a Fibonacci retracement tool, simply identify a range which is

considered to be important and divide that range into the ratios mentioned above.
Each line then represent an area of potential support or resistance and can be
viewed as such; marking periods where trend may reverse or even acting as a
framework for placing stops or taking profits.
Figure 11 DJ 30 – Fibonacci Retracement Tool applied from 1987 low to 2007 High
Using the Fibonacci retracement tool in ProfitSource you can see a recent
example of these ratios at work on the Dow Jones 30.
Once this tool is selected from the „Drawing Tools‟ palette, it can be positioned on
the chart by clicking once at the bottom of a range and once at the top of the
range. The tool will then automatically divide that range into the component
Fibonacci ratio percentages. This allows the analyst to easily look for support or
resistance around these areas. In some instances it is possible to measure
multiple ranges (i.e. the major range from a cyclical low to high combined with a
smaller range taking into account the most recent bull market) and project these
Fibonacci numbers into the future. Where there are several lines grouping
together, these are considered even stronger areas of support or resistance.
The lines, considered in this fashion, help divide up a previous range although will
only ever give restricted price targets within the price extremes already in
existence. In order to „forecast‟ resistance and support beyond and existing range
other multiples must be used; 161.8% for example.
Experimenting with the “Wave Extension” Tool (found

in the drawing tools palette) will give you some
experience of actually doing this. That‟s the nature of Elliott Wave, although far
more detail is shown in the next section. First we must very briefly consider the
role of Fibonacci in the other element of forecasting, time.
Keeping the concept as simple as possible its easy enough to demonstrate how
Elliott used Fibonacci ratios to parameterize the length of time a wave would last.
This is a key point in calculating where and when a run should begin or end and
with huge practical application in the Time and Price Projections (TAPPs). Of
course, ProfitSource has the additional benefit of utilising some statistical
references when building a TAPP. You‟ll cover this in the first session of the
webinars.
For the moment, looking at the Fibonacci ratios effect on TAPPs in a simplified
fashion, look at the diagram below. Here we can see a complete Five Wave
impulse pattern.
Figure 12 Fibonacci in Time
During that pattern‟s unfolding, a bull run lasting 10 days might have been
followed by a bear run lasting some 6-7 days. The following Wave 3 bull run might
be corrected by 50% in time (that important Gann number, again), or 35 days.
Now that we understand Fibonacci ratios and momentum, it is the perfect

opportunity to drill down a little deeper into the structure of Elliott Wave and how
the individual waves are determined. The best way to illustrate this is to use
several diagrams to show where the waves will commonly pull back or extend to.
As you will see, there are many alternatives and this can become quite
complicated if you were to apply these rules by hand. Again, the consistency
provided by ProfitSource is a tremendous help in overcoming the problems
associated with variable counts and the diagrams below will help you better
understand how they fit together. Although the Elliott Wave structure is shown
below, please note that the ratios and statistical research represent guidelines to
help you understand how the waves are formed, not simply a direct model of how
the market will move!
Wave 2 is always related to Wave 1. It is common that Wave 2 will retrace either
50% (an important support level amongst Gann traders) or 61.8% (taken from
Fibonacci) of Wave 1. Testing has revealed that around 75% of Wave 2s will pull
up after retracing between these levels.
Figure 13 Ratios for Wave 2
Wave 3 is related to Wave 1 by one of several relationships. Typically, Wave 3 will

be 161.8%, 261.8% 0r 423% of Wave 1. The most common multiples are 1.618%
and 2.618% and you can see that testing suggests 75% of Wave 3‟s will extend
between these amounts.

Wave 4 is related to Wave 3 and typically retraces to around 23.6% or 61.8%.
Approximately 75% of Wave 4‟s will retrace between these levels. Although this is
not shown in the diagram, 60% of Wave 4‟s will retrace between 30% and 50%
(again, that Gann ratio). It is often better practice for a conservative trader to only
take Wave 4 trades (which you will learn later) if the fourth wave has retraced 50%
or LESS.
Wave 5 has two different relationships with previous waves. The one used will
depend very much on previous price action and are both shown in the diagram
below. First, if Wave 3 is extended (i.e. greater than 161.8%, then the Wave 5
should be equal to Wave 1 or 161.8% or 261.8% of Wave 1. If the Wave 3 is
smaller (less than 161.8%), the fifth wave is generally longer and over extends
itself. In these circumstances Wave 5 will be 61.8% or 1.618% of the height from
the start of the count (0) to the top of Wave 3 (3).
Working out these ratios by hand would prove to be time consuming and prone to
some serious errors of judgement. Of course, this is why you have invested in
your ProfitSource or IntegratedInvestor software.
Armed with all this knowledge it becomes possible to project the likely points a
wave will extend or retrace to. Equally, it becomes possible to adopt a timeframe
in which you can expect that wave to move into. These projections form the basis
of the price and time targets that are used in ProfitSource, however, they are not
used in isolation. Rather, statistical analysis of the actual recorded projections
from 30,000 trades has been undertaken in order to parameterise future
projections. The section on Time and price Projections (TAPPs) goes into further
detail on how you can use this powerful tool.
Although many techniques exist to trade various parts of the Elliott Wave pattern,
(such as the bonus Wave 3 break-out system in the appendix), to begin with we
will focus on two which are specific to the Elliott systems found in ProfitSource.
Based upon the Elliott formula and projections we can take a view as to where the
market is heading and create appropriate trading plans. The latter stages of the
course and online modules will all focus on how to discriminate between the better
trades and the not so good ones, however, we need to start with the basics.
There are two types of Elliott Wave trade, one to trade reversals and one to trade
with the trend. It is these trades which make up the first stage of the TradingKey
strategy and they are both used to populate the pre-computed scans used as our
initial shortlist.
As we have already seen, Elliott Wave is a collection of complex techniques with

an infinite number of permutations. The counts can vary and often arguments can
ensue on the validity of counts and their consistency. With this in mind, it was
never our intention with ProfitSource to build the ultimate Elliott Wave software;
rather it was our goal to take the 60% of Elliott theory that is clear and simple and
put it into a practical application.
ProfitSource provides a basic display of consistent wave counts, allowing users to

recognise familiar trade patterns. It is a simple and consistent method of
establishing market direction.
Elliott Wave theory is a wide-ranging technical analysis discipline which tends to

become very complex, especially when used over short periods of time for day-to-
day trading purposes.
ProfitSource’s Elliott Wave algorithm applies basic Elliott theory, using a number
of oscillator and momentum filters to identify and match broad-based impulse and
corrective waves in a security's price movement.
The ProfitSource Elliott Wave presentation has three main components:

Impulse Wave point identifiers
Corrective Wave point identifiers, and
Time and Price Projection (TAPP) boxes
Figure 17 Phelps Dodge Corp – Daily Bar – Three Elliott Wave components
Above, we have also marked the oscillator which is also a vital component when
trading with ProfitSource. We will be detailing the use of these later in the course.
The software analyzes the entire range of data points and identifies sets of
Impulse Waves. We will look at changing the number of points to get an idea of
the market direction over different time frames, however, you will notice that the
default count is set to 300 data points. This means that the algorithm is looking
back over the last 300 bars in order to discover Elliott patterns.
Impulse waves occur in groups of five. The relationships between the various
waves' range and retracement are subject to strictly defined rules. These rules
make up part of the analysis used by ProfitSource to identify the wave patterns.
Calculations of relative oscillation and momentum are also part of the wave-
detecting algorithm.
Impulse waves can move in either direction: Up or Down.
When the waves are identified, they are numbered 1 to 5 at the end of each wave
(the first wave's starting point is identified by a zero). Should a wave be confirmed
(i.e. it has met the rules of retracement, extension and/ or oscillation) then it is
labelled with a purple number. If a wave is in progress and has yet to be
confirmed, it can be identified by a light blue number.
Three of the waves (numbers 1, 3 and 5) determine the overall price trend of the
security. These three directional waves are separated from one another by two
counter-trend interruptions, the waves numbered 2 and 4. As mentioned
previously, there are strict rules which apply to the relationships between each of
these waves. For example:
1. Wave 2 never ranges beyond the starting price level of Wave 1

2. Wave 3 is never the shortest wave
3. Wave 4 never enters the price territory of Wave 1
If the rules (and others) are not met, the formation will not be identified as an
Elliott wave on the price chart.
Impulse waves, whether bullish or bearish, are longer in duration and more readily
recognisable than corrective wave patterns. As such, most traders will tend to make
their significant returns during these longer, predominant trend continuation and
reversal trades. Corrective patterns are labelled by ProfitSource so it is well worth
mentioning how and where you may encounter these in your software. As we saw
earlier, an impulse pattern consists of 5 waves, whereas the corrective phase
consists of 3, labelled A, B and C. We can now broaden that concept slightly to
show that corrective patterns can be grouped into two different categories.
Simple corrections or „Zig-Zag‟ patterns are the basic A, B, C correction that

occurs before the beginning of the next count.
Figure 18 Corrective Waves

More complex patterns, such as a „Flat‟, a „Triangle‟ and „Irregular‟ correction will
also be labelled with an A, B, C. Don‟t worry too much about these different
corrections because they are notoriously difficult to trade. Just be aware that, as
you use your ProfitSource, you may become exposed to patterns where several A,
B, C‟s are displayed consecutively.
Figure 19 Complex Corrective Patterns
Again, these will occur before the beginning of the next count, as in the example
above. Just remember, trading a corrective pattern is far more risky than waiting
until a more conventional and „clean‟ Elliott structure has revealed itself. If the
count is undetermined move to the next chart.
One frustration experienced by novice traders is the changing of an Elliott count.

An Elliott count may change as more data points reveal a different structure to the
market and ProfitSource‟s Elliott Algorithm recalculates using this most recent
information.
With more experience and a greater skill in picking trades this becomes less of a
worry as it is often turns to the benefit of the trader. The most likely scenario of a
change in count whilst you are in a trade would occur if a Wave 5 is subsequently
deemed to have the momentum of a Wave 3. On occasions where an entry as
been triggered, yet the market does not move as expected, risk management
rules will come into play.
The purpose of the Elliott Wave Long Range count is to analyse the same wave
formation using a longer wave length. Often this will result in an Elliott Wave being
included in one or more of the Elliott Wave Long Range's individual waves.
Figure 20 Long Range Counts
In the example above, the Elliott Wave (Long Range) formation contains five
waves of a shorter ranged Elliott Wave (shown on the inset image) inside the Long
Range Elliott Wave's 4th Wave.
This illustrates the concept of Elliott Waves being able to be subdivided into
smaller waves, and/or comprising a part of a larger wave. Again, the usefulness of
this tool is to clarify that the minor trend (that which is being traded) is sympathetic
with the predominant or major trends occurring in that market.
ProfitSource provides two mechanisms to provide time and price projections:

Time and Price Projection (TAPP) Boxes
Range Projector
TAPP boxes are automatically drawn for Wave 4 and Wave 5 if the indicator is
turned on. The EW5 TAPP box in particular is great for determining where the
Wave 5 is likely to come in. The EW5 Buy or Sell trade is not supported by the
TAPP.
The Range Projector works for either the EW4 continuation trade set-up or the
EW5 reversal trade.
Both indicators work very well and either can be used to determine time and price
projections. We will discuss each of them in the following sections.
Once a strong impulse and correction wave pattern has been identified, it
becomes possible to extrapolate the trend into the future and make projections of
possible price and time targets on to the price chart.
These projections are automatically generated by ProfitSource for the 4th and 5th
waves. The full extent of the 3rd wave must be known before the projections can
be made. ProfitSource supports 2 kinds of TAPPs:
Time and price projections based upon how stocks have behaved in the past, in
short they are based on the premise that history repeats itself. What a stock has
done in the past is a good indication of what they will do again in the future. The
source of these statistics is discussed at the end of this section.
Figure 21 Statistical TAPPS settings in ProfitSource
This is time and price projections based on Fibonacci ratios.
These ratios are widely accepted as highly effective predictors of stock behaviour
and form the basis of Elliot‟s original wave theory. Typical ratios are 0.238, 0.38,
0.618, 1.618.
For example, Wave 4‟s typically retrace from 24% to 62% (both rounded up) of the
prior Wave 3 length.
Figure 22 Statistical TAPPS settings in ProfitSource
Additionally, these projection methodologies can be combined into one TAPP. For
example, you may desire to use a Fibonacci calculation for time and a statistical
calculation for price as illustrated below:
Figure 23 Alternate TAPPS settings for Time and Price Calculations in ProfitSource
Statistical TAPPs start with the Fibonacci TAPP and then make adjustments
based upon the statistical probability that the TAPP will be reached.
Although straying away from pure Elliott theory, this allows a trader to create a
more probable forecast based upon profitable results.
The difference in projections can be easily illustrated as below with the statistical
probability shown as a blue rectangle and Fibonacci projection given by the
default TAPP tool:
Figure 24 Exxon Mobil – Daily Bar – Example of Statistical Probability display in ProfitSource
Evidently, in this example, the most extreme Fibonacci forecast (the upper of the
three maroon lines) results in a higher price and a longer time frame than the
more conservative statistical forecast.
Neither one is always right, of course. However, one should generally allow for a
more conservative trading approach – the statistical TAPP.
Note – It is recommended that you select “Statistical Probability” for both

the Time Calculation and the Price Calculation.
Statistical TAPPs have proven to be more reliable.
Counts were created and examined on all stocks on the AMEX, NASDAQ and
NYSE using all the available history for each stock. This generated some 30,000
samples from which we took our statistical analysis and thus created the statistical
TAPPs. The power and usefulness of statistical TAPPs can be seen in the
following example illustrating Wave 4 and Wave 5 TAPPs on the Nasdaq 100:
Figure 25 NASDAQ 100 – Daily Bar – Statistical TAPPs (Wave 4 and Wave 5)
For W4 price target, historically 90 % of W4‟s have completed on or above the

lower line.
For W4 time target, historically 90% of W4‟s have completed on or before the right
hand end of the target lines.
For W5 price target, historically 66% of W5‟s have completed on or above the
lower line.
For W5 Time target, historically 66% of W5‟s have completed on or before the
right hand end of the target lines.
The W5 TAPP provides a Target Line which includes a Target Date. The purpose
of this line is to indicate where two thirds of W5‟s are likely to have been
completed. This marker has two uses:
(A) When a W5 sell occurs after this line it has a high likelihood of being
successful, and
(B) For trading, this line lets us know that any significant W5 move is likely to
occur before this line.
An alternative to the TAPP box for time and price projection is the Range Projector
(RP).
For a trader looking to reduce risk, simply use BOTH the TAPP and RP and take
the MOST CONSERVATIVE of the two as your profit target.
The Range Projection tool takes the momentum, acceleration and other ratio
models to define a price projection zone. The various swings are assigned
separate momentum values such as Momentum 1, 2, 3, etc. Using the ratio of
these various momentums, ProfitSource calculates and plots a price projection
zone. This is not related to Elliott Wave theory, rather the RP is looking at the
most recent price action (the buying, selling and the length of bull and bear
moves) in order to forecast future turning points based upon those moves. If, for
example, there has been a high degree of bull activity, this is likely to continue
until the market conditions change. The RP will determine the duration and
momentum of that bull activity and provide a framework to project where that
activity will lead.
This price projection should provide major resistance for the current rally or fall. At
these levels prices will either reverse or go through with increasing momentum,
hence the name sometimes given to this type of indicator "Make-or-Break”.
The RP can be found in the “Drawing Tools” folder. Click on the icon and you‟ll
see the following drawing tools:
Figure 26 ProfitSource’s Technical Drawing Tools palette
You may wish to place the RP into your “Favourites Folder”, which can be done by
right-clicking on the RP icon and clicking on “Add to Favourites”.
Now Let‟s use the RP to get a time and price projection for the following chart:
Figure 27 eBay Inc – Daily Bar – Using the Range Projection tool
This chart is a classic Elliot Wave 5 Buy Trade, also called a reversal trade. It has
a nice 5 wave pattern in place and perfect oscillator divergence. What we are
after here is a bullish projection from the Wave 5. We will use the RP to get this
projection.
First click on the RP icon . This will turn your cursor into a copy of the RP icon
.
Next, click on the prior high (Wave 4 high).

Range Projector
Figure 28 eBay Inc – Daily Bar – Applying the Range Projection tool
You will see an arrow pointing up or down from the RP icon showing you the
direction in which the RP will be drawn. If your mouse is above Wave 4, you will
see a icon indicating that the RP target will be drawn above the Wave 4.
If your mouse is below Wave 4, you‟ll see a icon indicating that the RP target
will be drawn below the Wave 4.
In this case, we are after a bullish target, so drag your mouse above the Wave 4
high until you see the icon. Click a second time to draw the RP target.
The RP target will be a line with 3 hash marks in it. The first hash mark signifies
the earliest the stock will hit the price target, the second hash mark the average
time it will take and the last hash line signifies the longest it will take for the stock
to hit the line.
Figure 29 Close-up of the Range Projection tool display
You will also notice that the price target is displayed at the left of the RP target
line.
ProfitSource Tip – Use the Average Time Target hash mark on RP line for
target time.
The Range Projector, as with all ProfitSource drawing tools, has a number of
properties.
Double-click anywhere on the range projector line to open the following dialog
box:
Figure 30 Range Projection Settings dialog in ProfitSource

Use these settings to change the properties for the range projector calculation
and/or display.
Ignore the Swing Compression, Swing Periods and Maximum Swings parameters.
These are the default values automatically set by ProfitSource.
The range projector offers the ability to extend the price projection infinitely into
the future. To turn this off, un-check the check box next to “Extend Right” to turn
off the range projector extension into infinity.
Click on the “Defaults” and then “OK” to save these settings as default.
Three Projection Levels are provided:
Conservative – Statistically, 66% of Wave 4s that breach the previous Wave

3 reach this level. 66% of Wave 5s that breach the previous Wave 4 reach
this level.
Moderate – Statistically, 50% of Wave 4s that breach the previous Wave 3

reach this level. 50% of Wave 5s that breach the previous Wave 4 reach
this level.
Aggressive – Statistically, 41% of Wave 4s that breach the previous Wave 3

reach this level. 41% of Wave 5s that breach the previous Wave 4 reach
this level.
We will be using the Conservative range projection level.
Note – Range projection targets are only valid if the prior pivot (wave) has
been breached.
Sometimes referred to as an Extension Trade, the EW4 trade is entered after the
4th wave has been established and the 5th wave has begun.
Figure 31 Trading Elliott Wave 4
These trades are trend following and therefore generally less risky. They have the
following set-up requirements:
Wave 4 must retrace within a range in order to have a high probability Wave 5
extension. ProfitSource offers two methods of determining proper Wave 4
retracement:
Retracement between 24% and 62%. These are from the Fibonacci ratios that
we discussed earlier in the course (shown in diagram below).
Wave 4 comes in within the wave 4 TAPP box (not as widely used).
The oscillator must pullback to zero as the Wave 4 is labelled. Although a pullback
to zero is optimal, a pullback between 90% and 140% is acceptable.
The Elliott Breakout Trigger (EBOT) is a proprietary ProfitSource indicator that
signals when a new wave has begun. ProfitSource automatically places these on
an EW chart at Waves 3, 4, and 5.
The following chart illustrates these three basic requirements:
Figure 32 Phelps Dodge – Daily Bar – EBOT Entry Triggers
Deviation Channel Breakout
The standard deviation channel is constructed automatically by ProfitSource in 2

stages.
Firstly, the middle line is drawn as a normal regression line. For those not familiar,
the regression line is simply a line of best fit – with half of the price points above
and half of the price points below the line.
Next the variance (or distance) of the different price points away from that line is
measured and the standard deviation is calculated. The standard deviation lines
above and below the regression line capture around 68% of the price. By using 2
standard deviations that number is increased to 95%. Now, if all that seemed a
little complicated, don‟t worry. All you need to remember is that 95% of the price
data is going to be contained within the channel lines, if it breaks out, then
something unusual is happening.
To select the standard deviation channel tool, simply open up the drawing tools
palette and select the Channel Tab, then click on Std Dev Channel.
When the tool is activated, simply left click once on the bar that represents the end
of the Wave 3 and then click once more on the end of the unconfirmed Wave 4.
This will give you a channel that contains 68% of the price data (1 standard
deviation).
Figure 34 Prudential – Daily Bar – Range Projection Channel settings
For the trading confirmation trigger, all you need to do is to extend that out to 2
standard deviations.
To change this setting, hover your mouse over the channel lines and right click to
open the Standard Deviation Channel Properties dialog box. From the Settings
tabbed page, just change the Top Deviations and Bottom Deviations settings to
„2‟ standard deviations.
After you press OK, the channel will spread outward from the center line.
Next hover over the channel and right click on your mouse. Select the Extend
Right check box from the dialog box, you now have a channel that will show the
short-term downward trend within the Wave Four, as the image below
demonstrates.
Figure 36 Prudential – Daily Bar – Standard Deviation Channel deviation settings
Any breakout from that channel can be treated as the start of a move into the fifth
wave and can subsequently be traded.
Everyone knows that stop loss orders should be used for each and every active
market position. The reasons usually cited revolve around risk mitigation, the
inability to watch the market 24/7 and even the psychological impact of consistent
trade planning. Regardless of the reasoning, it is agreed across the board that
stops are essential.
There are several different ways to set a stop loss order. The methodology
depends on the individual‟s risk tolerance and time frame. For a DividendKey
investor, the stop loss is dependent upon fundamental factors and not on a falling
price. For example, a company may drop 20% in price, but as long as it maintains
dividend payments, it remains in the portfolio. If it rises 20% in price, but can no
longer provide fully franked dividends, then a sales order is triggered.
For a majority of shorter term traders, and this includes TradingKey students,
price is the most important determinant of the stop and will dictate both the initial
stop and any subsequent trailing or progressive stops.
The initial stop is vital for both quantifying risk and calculating position size. This
should be a function of the risk capital (probably a percentage of the total account)
and is relatively easy to calculate:
Risk Capital
= The number of shares (or financial
Entry – Initial Stop instruments)
Loss
Most initial stops usually come in the guise of „technical stops”. The level at which
these are placed is based upon some degree of technical analysis derived from
the predominant chart pattern.
The Elliot Wave trader in the example below has decided to place stops below the
Wave Four. Technically this is a good position because it takes advantage of price
support, whilst also ensuring the trade is in the direction of the overall market
trend. As you know, an upward trend is characterised by a series of higher highs
and higher lows. A retreat in price below the Wave 4 low would represent the
formation of a lower low – hence, a break in trend.
Figure 37 GUD Holdings – Daily Bar – Stop Loss level set beneath Wave 4 low
Traders also employ volatility models when trailing stops. This might sound
extremely complicated, but actually is quite a simple strategy. The advantage of
volatility based stop losses is that there is a form of feedback between market
action and the proximity of the stop loss to the actual price action.
If the trading instrument is extremely volatile, the stop loss will be further away
from the price, and if the volatility decreases, stops will be tightened – hence
keeping the trader in the position longer.
Average True Range (ATR) was developed by Welles Wilder and is found
following simple formulae that calculate the true range and then the average of
that true range over a number of periods. The True Range is the greatest of either
of the following:
Current interval's High - current interval's Low, or
Difference between previous interval's Close and current interval's

High, or
Difference between previous interval's Close and current interval's

Low
When the True Range is determined for each interval, they are then averaged to
find the mean:
Sum of "X" True Range (TR) values
Average True Range (ATR) =
"X"
At the day of entry in our example, we can use the indicator function in
ProfitSource to see the ATR is around 27 cents.
Figure 38 GUD Holdings – Daily Bar – Stop Loss level set beneath Wave 4 low
Typically, traders will look for a multiple of the ATR and trail their stops
accordingly, based upon optimisation in the back-testing process. Using GUD as
an example, currently 2 times ATR is sufficent. Of course, it is still necessary to
convert this figure into a price point. In order to do this, simply take the ATR and
mulitply by 2, and then subtract this from the day‟s low (but only on days that the
market rises).
Entry at $5.37 on the 11th May, with the stop loss below the Wave 4 ($4.86)
Market rises on the 12th (the low of that day is $5.50) stops moved to (ATR x 2=
54 cents), stop loss moved up to $4.96.
The stop loss is constantly moved up until the profit target is activated or the
market returns and causes the stop to be taken out.
In the following example, stops are trailed until the market corrects – causing the
stop to be triggered on the 24th of April.
Figure 39 GUD Holdings – Daily Bar – Trailing stop triggered
The “Trailing Stop” indicator in ProfitSource allows you to do this automatically.

The image above shows the stop losses represented by purple dots calculated
daily by the software.
As you explore ProfitSource, you will see several other different ways of setting
trailing stops. For more information on these, simply select the „Help‟ function to
learn about them.
 Is the contextual environment supportive of the Elliott Wave structure (i.e. what
is support or resistance implying)
 Has Wave 4 retraced between 23.6% and 61.8%
 Does the TAPP or RP offer appropriate Risk v Reward
 Has the Oscillator pulled back between 90% and 140%
 Has the EBOT been crossed
 Has price broken out of the SD Channel
 Is the instant environment supportive of the trade (i.e. indicating a continuation
or reversal)
 Place Initial Stop Below Wave 4 for a Long, Above Wave 4 for a Short
The EW5 trade is entered after the wave 5 has been completed and the stock has
reversed course.
Figure 40 Simple Elliott Wave 5
They have the following set-up requirements:
Before entering an EW5 trade, first validate the prior Wave 4 trade as described in
the previous section. Once again, the requirements for an EW4 trade are:
Wave 4 Retracement of 24% to 62%.
Oscillator Pullback Between 90% and 140%.
Break of W4 EBOT.
Oscillator divergence uncovers waning (reduced) buying or selling pressure in the

5th wave. The Wave 5 oscillator must be smaller in amplitude than the Wave 3
oscillator to have oscillator divergence. Acceptable divergence is between 10%
and 100% – however 10% to 80% is used within the pre-computed scans which
we will discuss later.
As with the EW4 trade, a break of the EW5 EBOT signals that the 5th wave has
completed and a reversal has begun. The EBOT is a proprietary ProfitSource
indicator that signals that a new wave has begun. ProfitSource automatically
places these on an EW chart at waves 3, 4, and 5.
The chart below illustrates the three basic requirements:
Figure 41 Phelps Dodge Corp – Daily Bar – Elliott Breakout Trigger example
Trend-reversal trades involve, by their nature, more risk than a trend-following

trade.
When a reversal takes hold, the movement can be quite aggressive and
precipitates a tremendous profit taking opportunity. Of course, the reversal may
turn out to be a very short lived event before the predominant trend resumes.
For a trader, the issue can become whether or not to wait for a late entry and
possibly miss the quick money, or get in too early and possibly get caught in a
false break. Although the EW5 EBOT takes this into consideration, an alternative
way to take the trade is to wait for a signal from the share‟s actual price
movements and, fortunately for us, ProfitSource has a tool that can help do just
that.
can be found in Click the little light bulb icon in the chart‟s tool bar to open the
Hi-Lites palette. Click the New High tool to display the hi-lites on the chart.
Figure 42 Hi-Lites palette in ProfitSource
When selected, the tool will place a small dash at the top or bottom of a bar that
represents a new high or low respectively.
This dash defaults to a 10 bar new high or new low, as can be seen below in an
example for the Dow Jones 30.
Figure 43 DJIA – Daily Bar – Example of New High Hi-Lite tool

The ways in which a trader can go on to use this information are numerous,
however, just be aware that, a new high or low price represents a potential break
out.
In the expanded view of the Dow Jones 30 below, you can see the opportunity to
go long (or short) as new highs (or lows) are broken. As the trend becomes
increasingly better established there are plenty of more new highs (for an uptrend)
and new lows (for a down trend) being formed.
Figure 44 DJIA – Daily Bar – New High and New Low Hi-Lites applied
We will use this information in order to trade Wave 3 (with a triangle pattern) as
you will see later in the course, but for the moment we will restrict the New High/
Low tool as a simple breakout trigger when all the conditions of a valid Wave 5
trade have been met. Such a set-up exists on the Walt Disney example below.
As soon as the market trades higher than the 10 day high, the trader will want to
open a long position. As you can see in the example, this is somewhat lower than
the EW5 EBOT and effectively reduces the distance between entry and the initial
stop loss.
Figure 45 Disney Inc – Daily Bar – Use of New High Hi-Lite with EW5 EBOT indicator
As we saw with the Elliott Wave 4 trade, the initial stop loss should be placed in a
position which takes advantage of the market‟s technical position. In this instance
then, the best position for the initial stop will be above or below the Wave 5,
depending upon whether the trade is a long or short.
Without going into too much detail about how a swing chart is constructed, we can
build the progressive stop system very simply using ProfitSource.
The easiest way to incorporate this method is to select the Swing Indicator tool
from your indicator‟s palette.
Figure 46 Indicators palette in ProfitSource
By default the Points/Periods parameter of the indicator is set to a period of 1.
Left click on the indicator, open up the Swing Indicators Properties dialog and
change the Points/Periods field to 2:
Figure 47 Swing Indicator Properties settings dialog in ProfitSource
In an example of a long trade, such Kellogg (K:NYSE), stops are placed below the
most recent swing bottom low, as given by the swing indicator on the lower chart.
As each progressively higher swing low is made (and a low is formed on the
indicator) the stops are moved higher.
Figure 48 Kellogg – Daily Bar – 2 Period Time Swing Indicator
The advantage of this style of system is evident. When a stock is in a period of

sustained trending, higher tops and (more importantly) higher bottoms are
consistently made until the trending ends. By default, the position is open and
stops are progressively moved higher until the trend reverses or moves towards
uncertainty.
Traders also employ volatility models when trailing stops. This might sound
extremely complicated, but it is actually quite a simple strategy. The advantage of
volatility-based stop losses is that there is a form of feedback between market
action and the proximity of the stop loss to the actual price action. If the trading
instrument is extremely volatile, the stop loss will be further away from the price,
and if the volatility decreases, stops will be tightened – hence keeping the trader in
the position longer.
 Is the contextual environment supportive of the Elliott Wave structure (i.e. what
is support or resistance implying)
 Have all the conditions of a successful Wave 4 been met
 Does the Oscillator show divergence between W3 and W5
 Has the EBOT been crossed
 Has price made a new 10 day high (long) or low (short)
 Is the instant environment supportive of the trade (i.e. indicating a continuation
or reversal)
This section is all about refining your Elliott Wave selection in order to pick better
trades.
One way that major financial institutions go about their stock selection is to employ
a process known as top down analysis. Put simply, decisions are made upon the
possible trends and direction of the entire economy before specific sectors are
identified as benefiting or struggling from the current and near future economic
environment. Companies that exist within those sectors are then reviewed as
relatively strong or weak and positions are implemented accordingly.
It is an easy task for any retail trader using ProfitSource to model this style of
investment and trading strategy. By using technical (and, if possible, fundamental
analysis), it is possible to profit from the higher probability opportunities top down
analysis reveals. The process for the TradingKey is very simple – just find long
Elliott Wave trades within an outperforming sector, or find short Elliot Wave trades
within an underperforming sector.
It is possible to simply look at the charts of the different sectors in order to confirm
which ones are trending and use subjective techniques to determine the trend.
Although this is not an ideal or measured method, it can offer a quick fix solution.
A more technical approach may be to use a moving average oscillator and

compare the areas of maximum oscillator divergence to see if one sector is rapidly
accelerating in trend compared to another. To work out this number as a
percentage for comparison, you need to divide the oscillator reading by the
corresponding price of the short-term moving average.
First, just click on the „toggle data window‟ icon:
Then take the Oscillator 1 figure, divide it by the MA1 number and multiply by 100.
In the example below, the positive divergence in May was:
26.4163 ÷ 145.458 = 18.1%
When comparing sectors, you can perform this calculation multiple times and then
rank them in order from the strongest (highest positive reading) and which is the
weakest (lowest negative reading).
The MACD (Moving Average Divergence / Convergence) is a popular and often
cited trading indicator. Developed by Gerald Appel in the 1960‟s, it has been
around for some years and there still seems to be large variations in how it is
interpreted and used by traders. TradingKey advocates the use of the MACD in
conjunction with Elliott Wave in a very specific way. Before we start, let‟s first
describe what the MACD actually is.
In your ProfitSource you will see a “MACD graph line” which shows the difference
between a fast and slow exponential moving average (EMA), taken from the
closing prices of the financial instrument (stock/ future etc.). In the image of
BHP.ASX below, the upper chart shows these EMAs in action, whereas the lower
chart shows the actual MACD. Within this lower chart the MACD graph line is
drawn in red and gives a positive or negative reading dependent upon which EMA
is above. Just like all moving average indicators, the MACD graph is showing us
momentum
Figure 49 FTSE 350 – Daily Bar – Oscillator example
Note – Although the 5,35 day Oscillator is used in this calculation, the
10,70 Oscillator can be used in the same manner to understand
the longer term (primary) trends.
.The second line, or signal line (known as the MACD Line in your software), is a
further smoothing of the MACD Graph line using another EMA, displayed below as
a green line. This is simply an exponential moving average of the previous
calculations. The effect is a smoother and slightly lagging line which can be used
as a relative reference point.
Finally, there is a histogram which gives the difference between the MACD Graph
and MACD Line much in a similar way as the oscillator shown in the previous
section.
Figure 50 BHP Billiton – Daily Bar – 12,26 Exponential MA and 12,26,9 MACD
One of the obvious and common ways that the MACD is interpreted is to use the
crossing of the Graph and Signal Lines as an entry or exit trigger.
If you want to practice using these signals, or even build them easily into your
trading scans, all you need to do is open up a new market scan and select
“MACD” from the “Signals” menu. The signals are elicited in the following manner:
MACD Graph line crosses over the MACD Line from below and turns up so that
both it and the histogram trend agree with the direction of the latest trend.
MACD Graph line crosses over the MACD Line from above and turns down so
that both it and the histogram trend agree with the direction of the latest trend.
As with all moving average based indicators, this will work well in strongly trending
markets. The lagging nature of momentum indicators, however, can cause all
sorts of trouble in sideways and choppy markets.
Rather than be completely reliant on the MACD for entry and exit signals, it is
useful to look at it as an indicator of the strength of a move. In this respect, a
trader will look for either divergence or convergence of the MACD Line with the
share price in order to build a bullish or bearish proposition. Convergence of the
indicator with price is bullish, whereas divergence is bearish.
Figure 51 MacQuarie Group – Daily Bar – Example of converging MACD signal
In the example of MQG.ASX, the MACD signal was rising concurrently as the
share price fell away.
A trader with an open position could look at this as a signal to reassess a short.
Waiting for a break of the bearish resistance line could provide an appropriate
time to take profits or look to establish new long positions.
As the updated chart below clearly demonstrates, the MACD was identifying an
underlying change in the momentum of the move.
Figure 52 MacQuarie Group – Daily Bar – MACD signal confirmed
Very clearly this has potential repercussions and advantages for any trend
reversal trading, such as the Elliott Wave 5 trades. As you will see in the online
sessions, it can also be used with a dramatic impact when it comes to selecting
Elliott Wave 4 trades, although the occurrence of convergence and divergence of
MACD with Wave 4 will only potentially eventuate in an extended Wave 4.
Outside of Elliott Wave, students of technical analysis will also notice other trading
patterns and information that can further the confirmation process.
In the example of CBA.ASX, the stock can be seen falling away in a downward
channel for some time. The underlying information given by the MACD line is
indicating that momentum is building to reverse this and the downward channel
might change in the near future. A failure by the CBA price lows in reaching the
return line (second channel line represented by the finer blue line) should have
already started alarm bells ringing to anyone living through that period.
Figure 53 Commonwealth Bank – Daily Bar – Example of converging MACD signal
The outcome of this pattern can be checked within ProfitSource, however this was
a trade shown in an article by John Jeffery and printed in HUBB‟s weekly
newsletter. You can search and read it within ProfitSource, as it illustrates how
these types of analysis are forward looking.
To add MACD to your chart, click on the MACD button in the indicators
window.
You will then see the ProfitSource default MACD settings showing the MACD lines
and a histogram.
Figure 54 IBM – Daily Bar – Example of MACD default settings
To set the defaults to 12/26/9, the industry standard settings, double-click on

either the MACD indicator or its description label (MACD [5.25.5]).
The following pop-up MACD Properties dialog appear.
Figure 55 MACD Properties settings dialog, Parameters tabbed page
Fill out the parameters as shown below and then click the Plots tab to open the
next page of property settings.
We will now set the colour and weighting of both the MACD graph and the MACD
line. MACD graph is the difference between the short period moving average (12)
and the long period moving average (26). MACD line is the signal line moving
average (9).
After clicking the Plots tab you will see the following:
Figure 56 Swing Indicator Properties settings dialog, Plots tabbed page
Next, change the colour to red and increase the weighting. Note that the Visible
check box is shown. Unchecking this will remove the MACD Graph line.
Once you have changed the parameters to match that above, click on the MACD
Graph drop-down menu, and select MACD Line.
MACD Properties settings dialog, Plots tabbed page, MACD Line selected
Figure 57 MACD Properties settings dialog, Plots tabbed page, MACD Line selected
MACD line is another name for the signal line. Change the colour to blue and
increase the weighting. Once you‟ve changed the parameters to match that
above, click on the MACD Graph drop-down menu, and select MACD Histogram.
MACD Properties settings dialog, Plots tabbed page, MACD Histogram selected
Figure 58 MACD Properties settings dialog, Plots tabbed page, MACD Histogram selected
The MACD histogram is another way to view MACD. Feel free to leave it on your
chart, but to remove it simply click on the check box next to Visible to toggle it off.
The last thing to do is to click on the Defaults button to save changes and make
them your defaults.
Click OK to confirm and save the settings and return to the chart.
Using the MACD signal as a confirmation tool can be achieved in a number of
different ways.
For Elliott Wave trades where you expect the price to bounce, look for price to
converge in a bullish fashion or diverge in a bearish fashion with the indicator.
In the example below, price has fallen to the Elliott Wave 5 and the analysis is
waiting for a bounce. In conjunction and as confirmation, the MACD has been
rising – a process termed „bullish convergence‟.
Figure 59 RSCH In Motion – Daily Bar – MACD confirming EW5
The same can be said and applied to the end of bullish periods in the market‟s
action.
Longer term traders and investors may decide to use weekly charts as opposed to
daily charts in order to take even larger moves from the market with less analytical
effort.
For example, looking at a weekly chart on the much publicised collapse of General
Motors, the final throes of the bull trend coincide with an Elliott Wave 5 and a
bearish divergence of price with the MACD.
Figure 60 General Motors – Weekly Bar – MACD confirmation of Bearish trend
The MACD, therefore, offers an Elliott Wave trader the confirmation signals
required to assist in the selection of trend reversal (Wave 5) trades. Extra
elements can also be scrutinized to see if a trade is worth taking. In previous
sections, the instant and contextual environments were discussed as often helping
to ratify a position, as can the chart patterns reviewed in the online sessions.
In the next section we will look at a method to determine and confirm the strength
of Elliott Wave 4 trades.
Bollinger bands were developed by John Bollinger and are based on a moving
average (usually a 20 day MA) with two bands: an upper band and a lower band.
These bands are derived by taking the statistical volatility of the 20 day MA and
adding a number of standard deviations (usually 2) for the upper band and
subtracting a number of standard deviations (usually 2) for the lower band.
The next chart shows these 3 lines:

Figure 61 Whole Foods Market Inc – Daily Bar – Bollinger Bands example
Bollinger bands are typically used in 2 ways:
Bollinger bands tend to expand when stock volatility increases and contract (or
squeeze) when stock volatility decreases. Sharp moves in the stock tend to occur
after bands tighten. Consequently, Bollinger bands are often used to find breakout
candidates – making it very good for straddles.
Statistically speaking, over 95% of the stocks movement is contained within the
bands. When a stock breaks outside of the bands, it tends to return between the
bands. Strong movements are signalled when a stock breaks out of the bands.
Additionally, stocks very often bounce off the Bollinger bands. Consequently,
Bollinger banks make excellent support and resistance levels. We will be using
this behaviour to confirm our Wave 4 set-ups.
The chart of MGI Pharma (MOGN) demonstrates how Bollinger bands tend to
contain a stock‟s movements. When the stock hits the bands it tends to return to
the area between the bands. In particular, you can see that the Wave 4 Buy
touched the upper band as the 4 was set, signalling a nice point of resistance.
Figure 62 MOGN – Daily Bar – Bollinger Band example of Bounce
The primary condition we are trying to detect with this filter is a stock breaking
below the lower Bollinger Band at around the same time that the wave 4 comes in.
Since stocks that break outside of the bands tend to return to within the bands, we
will be searching for the price low to cross below the lower band (which should be
followed by a move back up above the lower band).
Note – This scan has been built for you and is included as one of the
“downloads” during the online sessions.
The standalone Bollinger band trading system advocated by Professor Bollinger
himself can be adapted and put together with ProfitSource. The detail of Bollinger
bands and their calculations is taught in the online lessons, however, this section
will illustrate how to build and trade using this method. The premise that market
price action will bounce off a Bollinger band and that 95% of that price action will
be within the bands is again the foundation for the system. Here, rather than using
Elliot Wave analysis to identify how the price will react from a „bounce‟ and where
that price is likely to head to, the bands themselves are the trigger.
It is easily observed that the price tends to follow a Bollinger band during times of
trending, as such a bounce will represent a counter (secondary) trend move. In
the Wave 4 Buy example, the short-term (secondary) trend moves down during
the corrective Wave 4 before the subsequent Wave 5 impulse (part of the primary
trend) begins – the wave we trade. This change in direction can be signalled with
the Bollinger band bounce as confirmation of the Elliott pattern‟s validity.
However, should a trader decide to trade beyond the confines of Elliott‟s Wave
Theory, a second indicator is required to ensure that the price touching the band is
not merely part of a trend. To avoid this type of false signal we shall introduce a
new indicator, known as On Balance Volume or OBV.
On Balance Volume (OBV) was developed in 1963 by Joseph Granville as a

method of identifying where the „smart money‟ in the markets was actually going.
The way in which it is calculated is very simple. Merely add volume to the OBV if
the period‟s close is above the previous period‟s close or subtract volume from the
OBV if the period‟s close is below the previous period‟s close. This gives an
indication to the number of participants who are involved in a price rise or fall.
Subsequent logic would dictate that a rising or falling price with very few
participants would have a minimal effect on pushing OBV up or down, whereas a
price move with large volume confirmation would have a large effect on OBV.
Under normal circumstances OBV will simply mirror price action as traders buy
and sell stocks/ futures etc. in sympathy with general market sentiment. Every
now and again, however, large players (such as institutions) may begin to
accumulate or distribute positions in anticipation of price changes. During these
conditions OBV will diverge or converge with price.
In order to practically interpret this information, study the example below of Exxon
Mobil (XOM.NYSE):
Figure 63 Exxon – Daily Bar – Example of the On Balance Volume (OBV) indicator
From the chart, it is noticeable that the predominant price action through May and
June was downward. Equally, after consulting the OBV for confirmation of this
depreciation, it can be seen that OBV had actually bottomed out and was
beginning to rise. By definition, traders were witnessing a period where the
number of participants on a „down day‟ was smaller than the number of
participants on an „up day‟.
A change was afoot. Although on its own this is not enough to initiate a new
market position, it may coincide with other bullish indicators to substantiate a
premise that the market is set to turn.
Using OBV with Bollinger bands is a similar exercise. In this circumstance the aim
is to look for a second „tag‟ by price on the Bollinger band. If this second tag
occurs during a period of bearish divergence or bullish convergence with the OBV,
then the signal is confirmed.
Figure 64 Telstra – Daily Bar – OBV confirming Bollinger Band tags (Short)
For short trades the price will be required to „tag‟ the upper Bollinger band on two
occasions whilst the price is rising or remains flat. If there is bearish divergence
with the OBV (i.e. the OBV is falling) then a sell order is initiated.
Stops can be moved on a volatility (ATR) or technical basis.
Figure 65 QWEST Coms – Daily Bar – OBV confirming Bollinger Band tags (Long)
For long trades the price will be required to „tag‟ the lower Bollinger band on two
occasions whilst the price is falling or remains flat. If there is bullish convergence
with the OBV (i.e. the OBV is rising), then a buy order is initiated. Again, stops can
be moved according to volatility or technicals.
This type of trading signal has the advantage of using two unrelated variables in
order to confirm trades. The Bollinger band is calculated from the price chart,
whereas the OBV comes from a calculation performed on the volume. This trading
method can be further ratified by using the structural elements provided by Elliott
Wave. In the online modules you can see how the Bollinger band and OBV
strategy is combined with Elliott Wave Four and Elliott Wave Five trades as the
key confirmation indicator. You can also see how the instant and contextual
environment can help determine which trades offer the highest probability of
success.
The Bollinger Band system described above identifies financial instruments whose
price has experienced an excursion outside of two standard deviations from the
average. As the average is calculated using a moving average over 20 periods,
any movement towards the bands is either a strengthening of the primary trend or
a potential pull back into a secondary trend. Should the secondary trend not last
and the market‟s strength return, the ideal conditions for an Elliott trend (following
trade Elliott Wave 4) have been met. Combine this with the non co-linear indicator
from the OBV volume study and there is an excellent chance that the confirmed
results have high probability. Although the use of top down analysis will further
improve trade selection, the number of trades matching all criteria may not be
particularly high.
In the example illustrated below, rising OBV coincides with the sell off and
secondary trend formed during Wave Four.
The EBOT is triggered and the trade progresses into the TAPP as price moves
back into the primary trend.
Figure 66 Fidelity National – Daily Bar – OBV Confirms Wave 4 Trade
After analysis is complete, a trader needs to calculate position size, execute an

order and manage the subsequent positions.
If avoiding co linearity is the goal of a successful trader, then there are few things
better than looking at information from the fundamentals of a company, or data
from the options market. Strong fundamental factors might be the clincher when
deciding between two equally promising technical set-ups, or a comparatively
„weak‟ fundamental figure might become the key to keeping you out of another
wise „bad trade‟. Every piece of „market intelligence‟ should be used to give you
that extra „edge‟ against every other market participant when selecting your Elliott
trades.
There are many different types of ratios available to traders and investors alike. It
is our intention here to show you three which complement each other and can be
used in conjunction to produce better trading results.
Ratio analysis is not just about comparing different figures from the income
statement, balance sheet and cash-flow statement. There‟s more to it than that! It
is more about comparing the figures against those for previous years, other
companies, the industry, or even the economy in general. Ratios look at the
relationships between individual values and relate them to how a company has
performed in the past and might perform in the future.
Several ratios are easy to calculate and easy to use when it comes to the quick
decision making and analysis of a trader.
he P/E ratio is probably the best known and most easily acquired ratio. Sometimes
called the multiple, the P/E is often thought of as a bit of a dirty ratio and is open to
some differences in interpretation, but for a „quick glance‟ it provides some instant
information. To calculate the P/E ratio is simple enough:
Share Price
P/E =
EPS
Where: EPS = Earnings per Share
The idea behind the P/E ratio is that it is a prediction, or to use a better phrase, an
expectation of the company‟s performance in the future.
A higher P/E would suggest that market participants are expecting big things from
a share, compared to one with a lower P/E.
A quick check of the average P/E of the overall market and comparison to the P/E
of the stock in your Elliott trading short list will also reveal a bit more; if the P/E is
much greater than the average, the bulls have a vested interest and you‟ve
probably already missed the boat.
The Price Earnings Ratio is a good way of getting some quick and easy
fundamental information regarding the market‟s expectations of a share‟s value.
Last month, we saw how it can be used to determine the worth of a stock against
its competitors and against the sector in general, as well as giving us an inkling,
that the market as a whole may be historically over-valued. Not bad for the
simplest of the ratios.
It is, like all things, not without its limitations. Without going into these in great
detail (and experiencing the merciless editorial guillotine!) let‟s just remember that
the P/E ratio only considers earnings in relation to price. Earnings come off the
balance sheet and are extremely important, but they look backwards. Even if
projected earnings are used, we have no way of looking at a shares performance
over time. Ideally we need to be dynamic, we need to not only look at the size of
the tree, we need to see how quickly it is growing.
This is where the PEG comes into its own. PEG is the relationship between
price/earnings and earnings growth:
P/E Ratio
PEG =
Earnings Growth
Earnings growth may be predicted or it may be trailing, but it is always annualised

into a growth percentage. The PEG simply compares the P/E ratio to its EPS
growth rate. Remember, the P/E is supposed to reflect a stock‟s future earnings
growth. If they are equal, i.e. the PEG is „one‟, it means that market participants
are rationally pricing the stock at its correct value.
If the PEG is greater than „one‟, the stock is possibly overvalued as investors are
paying too much for future growth, and obviously less than one is undervalued.
This is only a rule of thumb and you may find that different market commentators
prefer to use different PEG tolerances in picking shares.
As ever, it‟s always easier to understand a new concept with the help of an
example, so consider the following:
Stock A is a zinc miner and has a price which is 60 times greater than its earnings
(P/E ratio), and has a growth in earnings of 35% per annum.
Stock B is a book publisher and has a price which is 40 times greater than its
earnings (P/E ratio), and has a growth in earnings of 28% per annum.
Which is the best value? Well, the PEG for Stock A is 1.7 and the PEG for Stock B
is 1.4. Despite the fact we may feel the resource boom justifies high P/E ratios,
when it comes to value, the future growth rates of „A‟ mean it will have to
consistently beat expectations to substantiate its price. „B‟ on the other hand may
not be in the most lucrative sector, but good management and branding means it‟s
more modest growth is reflected better in its price. Stock B is the cheaper!
Popularised by Kenneth Fisher and James O‟Shaughnessy, the price to sales

ratio is a means of acknowledging how much the market is willing to pay for a
dollar worth of company sales. The theory being that a company that sells a lot
relative to its market price is healthy, compared to a company that sells very little.
The calculation is very simple:
Market Capitalization
PSR =
Sales (over 12 months)
A lower PSR (for example less than 1) is thought to be a better investment as you
are paying less for each unit of sales. In fact, when O‟Shaughnessy back-tested
44 years of data on the S&P Compustat database he revealed that a PSR of 1.5
or less was a necessary component of a successful growth stock.
Obviously some companies will always have higher sales than others, due to the
nature of the industry in which they are engaged. As such it is not worthwhile
comparing the PSR across a wide variety of sectors as this will only lead to a
misinterpretation of potential investment decisions.
Every day, multitudes of traders embark upon the task of trying to predict the
direction and movement of stocks. Within the analytical tools typically at their
disposal, technical analysis and fundamental analysis are considered the most
useful; however some traders also look to the options market to try to understand
and predict stock price movements.
The idea behind this concept is that the leveraged and complex nature of options
restricts their use to more sophisticated (institutional) traders and investors, who
are better armed at recognising opportunity. Here are some examples of popular
indicators that are used.
The ratio of the number of open calls positions relative to the number of open put
positions on a given stock at a given expiry can tell you how many option traders
are bullish relative to the number of bears for a certain date. In a joint paper
published in the National Bureau of Economic Research, Pan and Poteshman*
performed daily cross sectional analysis on 10 years of CBOE data to reveal that
doing nothing more than buying stocks with low put/call ratios and selling stocks
with high put/call ratios generated a return of 1% per week.
IV really refers to the expected volatility of an option‟s underlying asset up to the
option expiry. This information comes from the options pricing model and can be
used to determine the percentage movement a stock‟s price is likely to make.
In the example below, the IV from options expiring in 7 to 30 days for MSFT is
showing us that the options market is „pricing in‟ a possible 38% movement in
price over the next year.
Figure 67 Microsoft – Daily Bar – IV 7 to 30 Days plotted
Although that might not seem like a precise enough figure to trade, it is more
noticeable that IV has been increasing since the 6th of August, even though the
share price has not moved significantly. The options market is expecting a move
in MSFT.
If you have access to call and put volume intraday data, as you can get from an
OX account, look for unusual activity in volume. By comparing the average daily
traded volume with the number of calls or puts being placed, you can see where
option traders are beginning to set their stalls. Lots of calls is obviously bullish,
whereas lots of puts being placed is bearish. Note as well the „way‟ in which
orders are being placed. Are there huge slabs of contracts going through,
indicating program and institutional activity?
Just be aware that there is usually a reason why a stock‟s option trading may be
more active on certain days than others. News, earnings and government
announcements could all have a natural effect on option volumes and you will
need to filter these out. It is when there is no apparent reason for big bets to be
placed, that should be a warning that someone knows something!
One final note of caution: when it comes to looking at option trades to help pick
stock direction – Please ensure that you look across the whole series of a stock‟s
strike prices and expiries. A huge increase in calls may well be part of a spread
trade, a roll-over or other multi-legged option strategy.
 Is the stock„s sector complimenting the Elliott Wave trade

 Does the MACD support the Elliott Wave trade
 Do Bollinger Bands and OBV support the Elliott Wave trade
 Is the Stock‟s P/E less (for longs) or more (for shorts) than the industry
average
 Is the Stock‟s PEG less (for longs) or more (for shorts) than the industry
average
 Is the stock‟s PSR less (for longs) or more (for shorts) than the industry
average
 Is the Put / Call ratio supportive of the Elliott trade
 Is the Stock‟s IV increasing or decreasing
 Do the intraday option volumes give any indication to support the trade
The price break out trading system is a short-term trading system that requires an
increased level of subjectivity. Although the rules are well defined, the moments
when the system should be instigated are slightly less clear because they involve
some pattern judgment by the trader. One thing that should be observed,
however, is the restricted use of the breakout trading system in Elliott Wave 3.
The pattern that occurs frequently with a successful break-out in this trading
system is a „triangle‟.
Although we did not mention these in any detail in our earlier discussion of chart
patterns, a triangle is easy to recognise and easy to trade. Typically a triangle will
form after prices have been trending for a while but then fail to make new highs or
lows. They undergo a short period of consolidation. It is during this consolidation
that we can look for clues as to which direction the market will ultimately break
and take positions accordingly. Often you will find that the subsequent break out is
in the direction of the previous trend. Triangles can be further sub divided into
special categories.
Figure 68 Ascending Triangle pattern
The ascending triangle is a variation of the symmetrical triangle. Ascending

triangles are generally considered bullish and are most reliable when found in an
uptrend. The top part of the triangle appears flat, while the bottom part of the
triangle has an upward slant.
In ascending triangles, the market becomes overbought and prices are turned
back. Buying then re-enters the market and prices soon reach their old highs,
where they are once again turned back. Buying then resurfaces, although at a
higher level than before. Prices eventually break through the old highs and are
propelled even higher as new buying comes in. (As in the case of the symmetrical
triangle, the breakout is generally accompanied by a marked increase in volume.)
To qualify as an ascending triangle and a continuation pattern:
A trend must already exist
The upper horizontal line must connect at least two daily highs
The lower ascending trend line must have represented bullish support on at
least 2 occasions. These reactive lows should be progressively higher
As the pattern develops volume usually falls, before increasing dramatically
as price breaks out
A price target is formed by looking at the widest part of the triangle and
projecting it upwards
A descending triangle pattern is illustrated below. The pattern is identical

(although entirely inverse to the ascending triangle.
Figure 69 Descending Triangle pattern
The descending triangle, also a variation of the symmetrical triangle, is generally

considered to be bearish and is usually found in downtrends. Unlike the
ascending triangle, this time the bottom part of the triangle appears flat. The top
part of the triangle has a downward slant. Prices drop to a point where they are
oversold.
Tentative buying comes in at the lows, and prices perk up. The higher price
however attracts more sellers and prices re-test the old lows. Buyers then once
again tentatively re-enter the market. The better prices though, once again attract
even more selling. Sellers are now in control and push through the old lows of this
pattern, while the previous buyers rush to dump their positions. (And like the
symmetrical triangle and the ascending triangle, volume tends to diminish during
the formation of the pattern with an increase in volume on its resolve.)
To qualify as a descending triangle and a continuation pattern:
A trend must already exist
The lower horizontal line must connect at least two daily lows
The upper descending trend line must have represented bearish
resistance on at least 2 occasions. These reactive highs should be
progressively lower
As the pattern develops volume usually falls, before increasing
dramatically as price breaks out
A price target is formed by looking at the widest part of the triangle and
projecting it downwards
The price break out trading system looks for a 15 day high to be broken following
a period of consolidation and ideally following a trend continuation pattern like
those listed above.
Breakout Trading System rules:
A Wave 3 MUST be underway
Buy on a breakout of 15 day high
NEVER go long below a 20 day MA
Stops Placed below last pivot in price (such as 2 day Swing low)
Sell on a breakout of 15 day low
NEVER go short above a 20 day MA
Stops Placed below last pivot (such as 2 day swing high)
Designating a high or low as a 15 day high or low is, again, relatively simple using
your ProfitSource software. Access the Hi-Lites Tab and select the „New High‟ of
„New Low‟ tool.
Once you have the HiLite on the chart, right lick and open up the „Properties‟
menu. Form here, click on the second tab “Parameters‟.
You will see that the default setting for the new high or low is set to 10 periods. If
you want to experiment, the lower the setting, the more trading opportunities you
are likely to be exposed to as it is more likely the market will trade into new
territory.
Figure 71 New High Settings dialog in ProfitSource
For this instance however, and in accordance to the rules listed above, change the
parameter to 15 periods.
The oscillator is used to verify the validity of the EW count and uses the following
rules:
Wave 3 oscillator lines up with wave 3 count.

Wave 3 oscillator pulls back to zero (or between 90%-140%).
Wave 3 and Wave 5 oscillators line up with wave 3 and wave 5 counts.
Wave 3 oscillator pulls back to zero (or between 90-140%).
Wave 5 oscillator is smaller than Wave 3 oscillator (this is called divergence).
Figure 72 Phelps Dodge Corp – Daily Bar – Oscillator confirming Elliott Wave
Note – The oscillator peaks do not have to line up perfectly with the peaks
of Wave 3 and Wave 5.
The oscillator peaks need only occur within the wave progression.
Wave Criteria: Data Points – 300. Current Wave is no older than 20 bars (e.g. W4
label is within 20 bars of W3) – this reduces the instances of over developed
waves.
Price Trend is for the overall impulse pattern e.g. W4 Buy = Price Trend Up
Oscillator Pullback to Zero. The oscillator is the most important indicator since it
uncovers institutional activity and the validity of the waves. Pullbacks from 90% to
140% are acceptable.
Wave 4 Retracement of 24-62%. Wave 4 should pullback at least 24% but no

further than 62% of the length of Wave 3. The exact retracement level is displayed
next to the Wave 4 label.
Indicators: Volume. Moving Average of the current day is greater than 300K (MA
Periods = 30)
Chart: Price. Close of the current day is greater than 10 (U.S. only).
Break of the Elliott Breakout Trigger (EBOT). The stock price must break above
(or below for bearish patterns) the EBOT signalling an entry.
Figure 73 EW4 Buy

EW4 Sell Trade
Figure 74 EW4 Sell
Prior Wave 4 Conditions Met. The likelihood of a successful EW5 trade increases
when prior Wave 4 trade conditions have been met (Oscillator Pullback between
90% and 140% + Wave 4 retracement between 24% and 62%).
Wave Criteria: Data Points – 300. Current Wave is no older than 20 bars (e.g. W5
label is within 20 bars of W4). This reduces the instances of over developed
waves.
Price Trend is for the overall impulse pattern e.g. W5 Buy = Price Trend Down.
Oscillator Divergence. The strength of the Wave 5 oscillator should be noticeably

weaker (smaller) than the Wave 3 oscillator. Divergence between price action and
oscillator movement signals the end of a trend.
Indicators: Volume. Moving Average of the current day is greater than 300K (MA
Periods = 30)
Chart: Price. Close of the current day is greater than 10 (U.S. only).
Break of the Elliott Breakout Trigger (EBOT). The stock price must break above
(or below for bearish patterns) the EBOT signalling an entry.
Retracement/Extension Criteria. Wave 5 has extended between 15% and 100% of

W0-3 measured from the W3 label.
Figure 75 EW5 Buy

Figure 76 EW5 Sell
Using the pre-computed scans within ProfitSource, you can quickly short list high
probability trades based upon Elliott Wave 4 and Elliott Wave 5 trend following or
trend reversal techniques.
Confirm and choose which trade within the shortlists are best positioned to return
a profit.
As you will learn in the online modules, a highly desirable element of a

confirmation tool is the ability to confirm the trade from another angle – something
described as “avoiding co-linearity”. A mistake which is often made by a trader is
to confirm a signal with another overly related or correlated signal. An example of
this is using a moving average in conjunction with an oscillator. Simply put, each
indicator is looking at the same data, using a very similar mathematical equation.
The result is an overly biased view of trade.
Elliott wave analysis is unique in that it is looking at the propagation of waves from
a Fibonacci and structural perspective. If you combine and confirm these signals
with price signals, patterns and form reading, you have reviewed the trade from
many angles. The use of fundamentals, options analysis and consensus figures
are more examples of looking at wider market information to confirm a trade.
This technical analysis refresher will act as a companion guide to all manner of
market conditions and reiterate how to formulate and create important charting
strategies. As Elliott wave exists within the sphere of technical analysis, we can
see how
Our goal in this course will be to make your analysis very systematic and simple,
focusing on a subset of the many indicators and analysis techniques available to
you. Within the TradingKey the majority of our attention will be on technical
analysis.
So, what about the fundamentals of a company? Can we ignore them and only
focus on technical analysis? Indeed, are fundamentals even important? Of course
they are and they should be looked at wherever possible. To understand technical
analysis a little further, however, and to go beyond the simple notion of charts it is
worthwhile to consider the following points about institutional investors, such as
the large mutual funds and investment managers:
Institutions account for the large majority of market activity – investing and
retracting billions of dollars of equity is a daily occurrence. With this huge money
flow and market dominance, you could say that institutions therefore have a
considerable influence on stock prices. In other words, any significant moves in a
stock‟s price are likely to be driven by institutional activity. What‟s more, these
institutions and their billion dollar investments are likely to be the result of in-depth
research carried out by their economists and fundamental analysts.
Since technical analysis and the many indicators used in technical analysis are
based on price, time and volume – factors where institutions impact the most – we
are getting some degree of fundamental analysis by default.
It is helpful to think of Technical Analysis (TA) as uncovering the activities and

intentions of the institutional investor and simply „piggy backing‟ off all their hard
work! Do not become overly arrogant though! Technical Analysis is reacting to
price movements and such reactions rely on momentum. Trend-following
techniques are therefore far more likely to return a profit than trend reversal
techniques: it is just a question of timing your execution, as you shall see.
There are some general filters derived from technical analysis that can be applied
to all the trading strategies in the TradingKey course. Although, for the most part,
you may consider that these are simply commonsense, when it comes to trading;
the problem with commonsense is that it is not all that common!
Although we will be using bar charts throughout the course, ProfitSource includes
five popular chart types that you will get exposure to as you learn more about
investing and trading.
Line charts are the simplest type of charts and

are drawn by joining the daily price to form a
continuous line.
Like most analysts and software, ProfitSource
creates the line chart by joining the Closing
price. However, this can be adjusted to plot the
Open, High or Low price.
Adjusting the parameters of the charts is
detailed in the Customising the Chart section
of the ProfitSource User Guide.
Candlestick charts are one of the oldest types

of charts used in technical analysis, having
been used in Japan since the 1800s to analyse
rice contracts.
Similar to bar charts, candlestick charts show
the open, high, low and close. To do this, a box
is drawn between the open and the close. Then
a line is drawn from the top of the box up to the
high and from the bottom of the box down to the
low. These are called shadows. If the stock
price closes higher than it opened, the box is
left empty. If it closes lower than the open, the
box is filled in. So as well as seeing the stock
price movement, you can also see the
relationship between the open and close for
each day.
Candlesticks have a colour coding system
similar to the bar charts. The colours indicating
up or down movements can be set to change
based on intraday variations, or in comparison
with the previous day‟s close.
Bar Charts are the most common type of charts
used in stock market analysis.
A vertical line is drawn between the lowest and
highest stock price of the period. A small line
(or tick) is placed on the left side to show the
opening price, while a tick on the right side
shows the close.
ProfitSource allows users to colour code the
bars to give an indication of trend direction.
From the chart properties dialog box, select
different colours for up and down, and choose
the trigger for the colour change. There are two
choices: Close in Relation to Open, and Close
in Relation to Previous Close. The default
colours are: green for up, red for down
Gann Bar charts are similar to bar charts.

The “]” bracket shows the price range, high and
low, for the interval – daily, weekly, monthly
quarterly or yearly.
The dots shows the opening price.
The “X” shows the close price.
These charts can be used in the same way as
bar and candlestick charts and offer Gann
enthusiasts the format in which they are most
comfortable.
Point and figure charts show the overall trend of

a security.
Whenever the stock price is increasing by a
certain value, an X is added to a column. When
the stock price falls by the determined value, a
new column of Os begins. The number of Os
and Xs in a column show how much the price
has moved before the trend has changed.
You can adjust the box side and the reversal
count for the point and figure charts, depending
on the individual stock price and your analysis
strategy.
Within the drawing tools pallet in ProfitSource there are all sorts of weird and
wonderful ways to draw lines, boxes, angles, fans and ranges. Despite the
diversity and different complexities, perhaps the most common and possibly the
most powerful are the simple straight lines tools. These straight lines typically
come in the form of horizontal, vertical or angled lines which are used to help a
technical analyst determine and link important prices on the chart. A broad
(perhaps overly simplistic) definition can be to term these lines as “trend lines”.
Whether they are angled as ascending, descending or horizontally simply tells us
whether the current trend is up, down or sideways. The lines also go on to give the
analyst some predictive power as to where a stock price is heading or even if its
current trend is under pressure to break.
A tremendously practical use of the trend line tool is to draw support or resistance
levels. These are simply horizontal lines which link a price that has been identified
as having significant bearing on the stock. This price could be a purely
psychological barrier or it could be a price which has its origins in fundamental
analysis – such as the intrinsic value of a company‟s assets or dividend yields
relative to interest rates. Regardless, they offer some information that could be
decisive when selecting a trade from a short list. It‟s easy to imagine how the price
reacts to these lines if you consider another, older name for them: glass floors and
glass ceilings.
A support line can be said to symbolise the price at which sellers are no longer
willing to sell. In other words, the support line will be the price level where the
perceived „value‟ of the underlying instrument matches its current market price.
Consider it like this, the support level has the potential to interrupt or even reverse
a down-trend as investors and traders increasingly recognise that prices have
fallen to a point where any further falls would begin to undervalue the asset. No
one wants to sell something for less than it is worth!
When drawn, it is simply a horizontal line which connects several lows in the
market: lows which the market has recently tested on occasion and failed to break
through on the downside. The more times that the support line has „held‟, the
stronger it is considered to be and therefore the more likely it can be expected to
hold in the future. For a trader there is some instant gratification to be taken from a
support line. It can become a great place under which to place your stop losses if
you are already long a particular stock or asset. Likewise the support line can be
an opportunity to start accumulating if the price is falling and your analysis
suggests the support line will hold. Further to this, a price which is on its way down
might present a good „shorting‟ opportunity, but if there are strong support levels
coming up, the warning bells might start ringing as the stock may not go down
much further, or it may even bounce.
As with all technical analysis, the charts are „showing‟ us the market forces at
work through the movements in price, but it is often worth considering why a
support line may or may not exist. This extra investigation may well go on to prove
the additional piece in the puzzle when it comes to taking (or not taking) a trade.
For example, are the fundamental components of the asset impacting the buy and
sell prices? Hypothetically, it could be the point at which the company‟s dividend
yield (i.e. the dividend paid to stock holders as an annualised percentage) is equal
to the bank rate earned on savings. At lower prices, the returns from the stock
investment exceed money placed in a savings account, so cash is better off in
stocks. If this is the case and dividends are halved or interest rates fall, there will
be a natural knock-on effect to the status quo. Alternatively, a floor might exist to a
stock‟s price as it represents a level where a competitor has decided to acquire
stock in a takeover bid or prices are being defended by a hedge fund to avoid a
particularly large fluctuation following an option‟s strike price being hit.
A bullish support line would then be a rising line drawn across the lowest points
of a price move. This line follows the predominant trend in the market and is
subsequently often referred to as a bullish trend line. By linking the successive
higher lows in the market it forms an upward moving line of support. Should a low
break this line, it can often act as an early warning indicator to a change in trend.
Figure 77 3M Co – Daily Bar – Support Lines

A resistance line symbolises the price level at which buyers are no longer willing
to buy above.
Again, the resistance line will be found where the perceived value of the
underlying instrument is equal to the current price.
This time, however, the line has the potential to interrupt or even reverse an
uptrend as investors increasingly become aware of the fact that further increases
in price will have the effect of „over-valuing‟ an asset.
A resistance line is easy to draw and is constructed by connecting several highs

with a horizontal line. Again, we consider the support line stronger if it has held for
many times in the past and is therefore more likely to hold in the future. This type
of simple analysis is easy to perform and may prove to be invaluable when
evaluating trading opportunities. If you see a potential long trade that must break a
strong resistance line before becoming profitable, it pays to be cautious in your
approach and amend stops accordingly. Equally, and just as importantly, any
break of a resistance level might mean the stock or future is ready to start a new
upward trend or is moving to a new range: potentially a great time to go long and
with an the option to place stop losses behind that resistance level. It is often
noted that old levels of resistance become new levels of support, or glass ceilings
become glass floors, and these little observations can have a dramatic effect upon
your trading.
In a declining market, where successive highs are failing to break above previous
highs, a bearish resistance line would then be a falling line drawn across the
highest points of a price move. This line follows the predominant trend in the
market and is subsequently often referred to as a bearish trend line. By linking
the successive lower highs in the market it forms a downward moving line of
support. Should a high penetrate this line, it can often act as an early warning
indicator of a change in trend and a reversal of the bearish sentiment. This is just
the same pattern as we saw in the bullish trend line – but this time it‟s the inverse.
Figure 78 IAG Daily – Horizontal Resistance Level
Support and Resistance are important points that should always be considered
before taking a trade.
Often other Elliott Wave formations will become apparent in the vicinity of these
points and provide indications of profitable trading opportunities. With this in mind,
it is always worthwhile to consider basic market geometry – i.e. basic straight lines
and their potential to disturb the expected Elliott count or set-up – before taking
any trade.
“The solution to any problem should be as simple as possible, but no
simpler.”
- Albert Einstein, Physicist
This could be the perfect motto for any successful trader using Elliott Wave. It is
certainly advice that every new trader or investor should heed. Novice traders
sometimes search for the Holy Grail of trading, seeking to learn and combine as
many technical indicators as possible, completely misdirecting their energy and
analysis away from basic, time-proven strategies. Of course, there are numerous
indicators available for an investor or trader looking to build primitive yet effective
trading systems. For example, something as simple as a price channel can yield
relatively good results. Although we will discuss the stand-alone method of
creating and trading a channel system, it is not recommended to use it in this way.
Having the extra information will doubtlessly prove useful in picking better Elliott
Wave set-up s and can be an important consideration in terms of an optional entry
which we will discuss later in Section 3.
A channel trading system works equally well for bullish, bearish or neutral
markets. Channel trading is based upon the premise that a market will move
between a trend line and a second line, known as the “return line”. As a market
moves down, for example, you will see the price move between the bearish
resistance line and its return line. This will provide buying and shorting
opportunities as long as these lines hold and price oscillates between the two.
In the image below, you can see that the price failing to reach the return line also
provides an early warning that the downward trend is no longer intact:
Figure 79 Return Line/Trend Line Anomaly

Equally, a market can move in an upward channel, or even in a sideways range, in
order to elicit trading signals. During certain periods of the business cycle,
especially when following sustained moves and during periods of indecision
amongst investors, range trading markets can offer significant money-making
opportunities above and beyond the conventional buy and hold investing that
could be achieved using a channel system.
For example, take the Commonwealth Bank (CBA.ASX) in the image below:
Figure 80 CBA – Daily Bar Chart – Range Trading Example
CBA was clearly moving in a sideways fashion between support and resistance at
around $39 and $44 respectively. Extending beyond the time-frame shown in this
chart, the trader may be able to make some observations that could prove to be
useful. For example, should CBA fail to reach the upper resistance line, it is
possible that the lower support line is in threat and may be breached. If the
opposite occurs, that is if the upper resistance line is touched and the subsequent
retreat does not fall as low as the support line, you could expect prices to break
this range to the upside.
For the Elliott Wave Trader, channels can be used to confirm or reject Elliott
patterns.
In the example of iShares HK ETF below, it is evident that the 5th wave reversal
increased in likelihood when the price failed to reach the return line, adding
confirmation to the trade‟s validity.
Figure 81 iShares HK ETF – Daily Bar – Elliot Wave Support Lines
There is also the opportunity to use a channel to act as an optional entry trigger,
or to confirm the proprietary Elliott Break-out Trigger. You will learn about this
trigger in the next section.
In the following graphic we can see the same period, however here we can focus
on the downward channel which makes up the fourth wave.
Figure 82 iShares HK ETF – Daily Bar – Downward Channel in Wave 4
As the price fails to reach the return line of the Downward Channel in Wave 4
channel, it becomes increasingly likely that the prevailing big picture bullish trend
is about to continue and the Wave 4 pull-back has come to an end. At the same
time, you may decide to wait until the bearish resistance line (the upper Downward
Channel in Wave 4 channel line) is broken before jumping onto the trade.
Gaps in market action often form the basis for levels of support or resistance.
The occurrence of a gap usually coincides with the release of some market
sensitive news, whilst the market is closed. If the earnings were significantly
higher than expected, for example, many investors might place buy orders for the
next day. This could result in the price opening higher than the previous day's
close. If the trading that day continues to be strong and remains above the
previous day‟s close, a gap will exist in the price chart.
Gaps can offer evidence that something important has happened to the
fundamentals or the psychology of the crowd that accompanies the market
movement.
Several different types of gaps can be identified, these include:

Breakaway gaps, where price breaks through a level of resistance or support:
Figure 83 AGL Energy – Daily Bar – Breakaway Gap example
Runaway gaps, where investors greedily try to buy shares in a rapidly rising
market:
Figure 84 QBE Insurance – Daily Bar – Runaway Gap example

Or exhaustion gaps, where a final last gasp move in the market is followed by a
quick reversal – these may even show themselves in the form of island reversals:
Figure 85 Foster’s Group – Daily Bar – Exhaustion Gap example
Resistance and support forms around the upper and lower parts of gaps and can
result in useful trading opportunities, both for stop placement or even entry
possibilities. If the resistance or support is broken, opportunities quickly become
apparent.
Look for Runaway gaps as an indication that you are in a Wave 3. In fact, a Wave
3 within a Wave 3 should have the most Runaway gaps!
Exhaustion gaps and Breakaway gaps are most likely to occur at the end of a
Wave 5.
On the whole, bottom patterns have a higher probability of a successful outcome
when compared to topping patterns, simply because it is the nature of a share or
market to rise over time.
The first patterns that we will discuss are important and commonly observed
market formations: the Double Tops or Double Bottoms.
In reality, the number of successful double tops and bottoms is not very high, but
they are so readily recognisable that the patterns receive a lot of attention.
The high number of failures from this pattern is because of its regular occurrence
– any up-trend or down-trend can easily become a „potential‟ double top or
bottom, in the exact moment before that top or bottom is broken and the market
action continues in the direction of the trend.
A market that has tried to breach a resistance line on two separate occasions and
has subsequently failed on the second attempt may form a pattern that is
commonly known as a “double top”. Similarly, a market that has tried to breach a
level of support on two separate occasions and failed on both occasions is known
as a “double bottom”.
Although not an exclusive requirement, this formation is especially significant

when these tops occur near to all-time highs, or the bottoms are near to all-time
lows. It is the subsequent retracement from that second top or bottom that is of
most interest to us. This move can be traded.
The distance in time between the double tops or bottoms will act as a filter that
can be used to determine the strength of the trade. Greater distance implies
greater strength .
One question is often raised, and one that can help to analyse a situation is as
follows: Is the variance in price between the successive tops or bottoms
significant? What is the range in price that is considered acceptable to confirm a
double top or bottom? For a stock, it can be said that a three per cent variance is
acceptable if they are formed more than six trading days apart. That is a
difference of no more than three per cent between the price of the first top (or
bottom) and the price of the second top (or bottom).
The final piece to the puzzle is the price target. When looking at a double top, the
vertical price range between the two tops and the intervening low between these
tops (effectively, the valley between the tops) is measured. This range can be
called 100 per cent. The general rule is to look for a 200 per cent retracement
away from the second top. The examples in the online sessions will make this
very clear and illustrate the way in which you may decide to trade using these
patterns.
In many respects a double top or bottom is a sign that the previous trend has now
come to an end. It does not, however, take an observational genius to note that
the majority of trends do not end with a double top or bottom. There are many
other topping and bottoming patterns which can be identified, but by far and away
the most common and most reliable is the head and shoulders pattern.
The head and shoulders is named because of the pattern‟s resemblance to a

person‟s head and shoulders. The formation is developed in five major stages. It
starts when a strong upward breakout occurs, reaching new highs with increased
volume (in the underlying instrument) as the bulls push the market higher. In many
respects, it looks very much like a continuation of a long-term bull move with a
strong trend apparent. A period of consolidation forms the second half of the first
shoulder, which is often accompanied by diminishing volume.
The head is formed next with another upward breakout, but volume remains low
relative to the first upward movement as the remnants of the bullish speculators
start to chase the market. This is the most important part of the formation because
the high is reached without confirmed volume (or any real enthusiasm) and prices
retrace quickly. Consolidation signals the beginning of the second shoulder before
a minor breakout with increased volume makes an attempt at forming a new high.
Upon the failure of this push, the head and shoulders pattern is complete. The
lowest points of the two lows on either side of the head become the neckline of the
formation and can be represented with a line of support.
Figure 86 BHP Billiton – Daily Bar – Head and Shoulders example
Generally, the traditionally accepted way of trading a head and shoulders pattern
is to wait until the market has broken through the neck line after the formation of
the right shoulder. The price target is simply the difference in height between the
head and the neck-line projected downwards.
Elliotticians have become very familiar with the head and shoulders pattern.
As a stand-alone pattern it is renowned for its reliability in picking market direction;

however its presence also exists in the simple impulse and corrective market
structure of Elliott Waves.
Figure 87 Elliott Wave Patternin Head and Shoulders
The above chart provides a snapshot of the progression of the market through
various phases of impulse and correction.
You can see that each highlighted area clearly depicts a head and shoulders
formation within the market‟s progression.
Often when describing the technical analysis philosophy and technical analysis
techniques it is useful to break a chart up into two separate phases or conceptual
scales.
Typically, this allows a trader to consider not only the importance of a pattern
leading into a trade set-up , but also to recognize the importance of the bars at the
moment of entry.
In other words, one of the real keys to trading successfully is to look at the bigger
picture, and then scrutinize the smaller picture. A couple of terms that can be
adopted to help divide the conceptual scales into separate groups are the
‘contextual environment’ and the ’instant environment’.
The contextual environment looks at the bigger picture, support levels,

resistance levels, double tops Elliott patterns, etc. across multiple bars (this can
be accomplished using any trading perspective, but monthly or weekly will most
likely be used with the TradingKey method).
The instant environment looks at the information that current or very recent
market action is providing (be it daily or intraday). When both of these are
compounded, more accurate analysis decisions can be made. If you do not have
access to intraday data or want to absolutely fine tune your trading decisions (or
paradoxically aim to minimise time spent on trading), all you need to do is look at
individual bars in the chart.
There are five pieces of very important information that can be gleaned from any
single bar. These become the focus when analysing the instant environment
because they tell you and are illustrated in the diagram below:
Figure 88 Five data-types of each Bar

Possibly the most important consideration when looking at a bar is to identify
where the close is in relation to the open. Between the morning and the afternoon
of a trading day, or between the beginning of one hour or minute to the next, the
position of the close will determine whether or not market participants were bullish,
bearish or indifferent to that time period‟s events.
Strong bullish or bearish patterns are likely to indicate the continuation of a current
trend, whereas those moments of indifference are most likely to exist around a
pause in the trend or possible reversal.
Figure 89 Analysing the Open to Close relationship
Secondly, it often pays to consider where the open and close are in relation to the
high and low of the day. If the close or open is near the high or the low, an analyst
can get a good feel for the ascendancy of the bullish or bearish sentiment during
the course of the day. Obviously, the closer in proximity these points are to the
high or the low, the more powerful the signal. Even in situations when there is no
real evidence given by the relationship between the close and the open,
assumptions can be made as to which group dominated trading into the final
moments of the trading period. The final example on the left (in the illustration
below) shows how the open was met with some fierce selling, but this had been
recovered into the close – the bulls were in control in the final stages.
Figure 90 Analysing the Open to High/Low relationship
The final piece that can be used for reference within the single bar is the
difference between the high and the low: the range.
A large range day will typically be more prevalent when there is decisive market
action. Conversely, smaller range days will occur where there is little or no strong
belief exhibited by either the bulls or the bears.
As is the case with all these patterns, the volume on the bar (week, hour or minute
if you can get access) and the distribution of the volume over the course of the bar
will have an additional bearing on the interpretation of the analysis. A strong close
with high volume will obviously have more impetus than the same price formation
with weak volume.
After looking at a single bar, the next logical step in analysis is to expand the
instant environment to take into account the bar or previous bars. This is not such
a huge stretch from the analysis done above. A very bearish bar followed by
another more bearish bar may insinuate that a down trend is about to strengthen.
A bullish bar followed by a less bullish bar followed by an indifferent bar may
signify the end of an upward trend.
The two examples below show potential reversals in the market, gleaned merely
from the very instant snapshot of the bars – what is happening now and what just
happened. This can be fine-tuned by asking the questions: “what is volume
suggesting when it comes to the bar in question? Are the bulls or the bears
dominant into the close?” The extra effort put into understanding the reasons
behind a move will always pay returns as you decide whether or not to execute.
Figure 91 Analysing Reversal Patterns
What makes a reversal or continuation pattern more probable is the contextual

environment.
Any Elliott set-up is going to contain a plethora of information from the contextual
and instant environment. This information can be used to confirm, or even reject,
the proposed Elliott Wave count.
Within Wave 3 you would expect to see a large number of strong trending bars,
whereas towards the end of a Wave 5, reversal days will begin to dominate.
In addition to the clues from the bars, look for patterns to occur around zones of
resistance or support.
Figure 92 Bar Analysis with Elliott Wave
In the above example, a clear outside day reversal bar is our instant
environmental evidence, signalling that a likely change is afoot! Combining this
with the contextual evidence given to us by the confirmation of the end of the
Wave 3 we get a feeling that the proposed Elliott count is on target.
Whilst waiting for entry, a double bottom marks the end of the Wave 4 (shown in
the magnified insert). What makes the double bottom more interesting is the price
action (instant environment) of the two bars, both closed well off their lows and
above their respective opens.

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Copyright © 2010 HUBB (Australia) Pty Ltd

All rights reserved.

For Australian Residents This information is provided by HUBB an Authorised

1. Workbook and course materials

The TradingKey course itself is composed of 4 online and interactive

The TradingKey course will explain and demonstrate concepts in a straightforward

- Norman Vincent Peale

Figure 1 – Market Movements

Elliott Wave Theory is a style of technical analysis. The TradingKey assumes a

“Elliott Wave analysis should be practiced with an understanding of TA”

Ralph Nelson Elliott was born in 1871 in Marysville, Kansas. As a professional he

After studying 75 years worth of data of stock market

Figure 3 Bullish and Bearish Elliott Wave Patterns

Wave 1 is generally considered to be the “short covering” wave. A bout of short

Figure 5 Typical Elliott Wave formation

Elliott further discovered that each wave, whether impulsive or corrective,

Figure 6 Elliott Waves within Elliott Waves

Figure 7 Trend Sympathy

ProfitSource is an amazing time & work saving tool for traders

Often times the oscillator is loosely referred to as “buying pressure” or “selling

In sequence these numbers are:

1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144

0%, 23.6%, 38.2%, 61.8%, 78.6% and 100%

Although not calculated by the Fibonacci sequence, technical analysts have

Figure 9 Fibonacci examples in Nature

In order to use a Fibonacci retracement tool, simply identify a range which is

Experimenting with the “Wave Extension” Tool (found

Figure 12 Fibonacci in Time

Now that we understand Fibonacci ratios and momentum, it is the perfect

Figure 13 Ratios for Wave 2

Wave 3 is related to Wave 1 by one of several relationships. Typically, Wave 3 will

Figure 14 Ratios for Wave 3

Figure 15 Ratios for Wave 4

As we have already seen, Elliott Wave is a collection of complex techniques with

ProfitSource provides a basic display of consistent wave counts, allowing users to

Elliott Wave theory is a wide-ranging technical analysis discipline which tends to

The ProfitSource Elliott Wave presentation has three main components:

Impulse waves can move in either direction: Up or Down.

1. Wave 2 never ranges beyond the starting price level of Wave 1

Simple corrections or „Zig-Zag‟ patterns are the basic A, B, C correction that

Figure 18 Corrective Waves

Figure 19 Complex Corrective Patterns

One frustration experienced by novice traders is the changing of an Elliott count.

Figure 20 Long Range Counts

ProfitSource provides two mechanisms to provide time and price projections:

Figure 21 Statistical TAPPS settings in ProfitSource

This is time and price projections based on Fibonacci ratios.

Note – It is recommended that you select “Statistical Probability” for both

For W4 price target, historically 90 % of W4‟s have completed on or above the

Figure 26 ProfitSource’s Technical Drawing Tools palette

Next, click on the prior high (Wave 4 high).

Figure 30 Range Projection Settings dialog in ProfitSource

Three Projection Levels are provided:

Conservative – Statistically, 66% of Wave 4s that breach the previous Wave

Moderate – Statistically, 50% of Wave 4s that breach the previous Wave 3

Aggressive – Statistically, 41% of Wave 4s that breach the previous Wave 3

We will be using the Conservative range projection level.

Figure 31 Trading Elliott Wave 4

Figure 32 Phelps Dodge – Daily Bar – EBOT Entry Triggers

Deviation Channel Breakout

The standard deviation channel is constructed automatically by ProfitSource in 2

Figure 33 Range Projection Settings dialog in ProfitSource

Figure 35 Range Projection Settings dialog in ProfitSource