New Elliottwave Execution and Correlation Final Aug 13 14552100 PDF

www.elliottwave-forecast.
com
The New Elliottwave,

Correlation, and Trading
Execution Seminar
Presented by: Eric Morera and Hendra Lau
August 13, 2016

Four Building Blocks of Technical Trading with EWF
01
Elliottwave Theory
02
Cycles, Sequences & Correlation
• Elliottwave Theory history and nature • Trend and cycle

• Fibonacci sequence • Trend line channel
• Different Elliottwave structures • RSI (Relative Strength Index)
• How to read Elliottwave charts • Fibonacci retracement
• Different degrees in Elliottwave • Fibonacci extension (expansion)
• Key difference in New Elliottwave Theory • Stochastic RSI
• Market correlation
03
Risk Management
04
Trading Execution
• Market psychology
• Constant risk per trade • Motive vs corrective sequence
• Risk to reward ratio • Counting swing sequence
• How to protect a position • 3, 7, 11 swing system
• Proper position size • Trading with the trend
• Market correlations
• Execute trade plan
EWF | August 2016 2

1. Elliottwave Theory
History
• The Elliott Wave Theory is named after Ralph Nelson Elliott. Inspired by the Dow Theory and by observations
found throughout nature, Elliott concluded that the movement of the stock market could be predicted by
observing and identifying a repetitive pattern of waves. In fact, Elliott believed that all of man's activities, not
just the stock market, were influenced by these identifiable series of waves
• Elliott was able to analyze markets in greater depth, identifying the specific characteristics of wave patterns and
making detailed market predictions based on the patterns Elliott based part his work on the Dow Theory, which
also defines price movement in terms of waves, but Elliott discovered the fractal nature of market action
• In the 1930s, Ralph Nelson Elliott found that the markets exhibited certain repeated patterns. His primary
research was with stock market data for the Dow Jones Industrial Average. This research identified patterns or
waves that recur in the markets. Very simply, in the direction of the trend, expect five waves. Any corrections
against the trend are in three waves. Three wave corrections are lettered as "a, b, c." These patterns can be seen
in long-term as well as in short-term charts
EWF Page 3
History (continued)
• Ideally, smaller patterns can be identified within bigger patterns. In this sense, Elliott Waves are like a piece of
broccoli, where the smaller piece, if broken off from the bigger piece, does, in fact, look like the big piece. This
information (about smaller patterns fitting into bigger patterns), coupled with the Fibonacci relationships
between the waves, offers the trader a level of anticipation and/or prediction when searching for and identifying
trading opportunities with solid reward/risk ratios
• In Elliott's model, market prices alternate between an impulsive, or motive phase, and a corrective phase on all
time scales of trend. Impulses are always subdivided into a set of 5 lower-degree waves, alternating again
between motive and corrective character, so that waves 1, 3, and 5 are impulses, and waves 2 and 4 are smaller
retraces of waves 1 and 3
• Corrective waves subdivide into 3 smaller-degree waves starting with a five-wave counter-trend impulse, a
retrace, and another impulse. In a bear market the dominant trend is downward, so the pattern is reversed—five
waves down and three up
• In the new theory of Elliottwave (EWF), the market trends in both corrective and impulse sequence
which is a huge difference compared to the old theory
EWF Page 4
Five Waves Pattern in Bullish Market
EWF | August 2016

5
Five Waves Pattern in Bearish Market
EWF | August 2016

6
Fibonacci Ratios
• Leonardo Fibonacci was a 13th century accountant who worked for the royal families of Italy. In 1242 he
published a paper entitled "liber abaci." The basis of the work came from a two-year study of the pyramids at
Gizeh
• Fibonacci found that the dimensions of the pyramid were almost exactly the same as the golden mean or
(.618)
• Fibonacci is most famous for his Fibonacci Summation Series which enabled the Old World in the 13th
century to switch from Arabic numbering (XXIV=24), to the arithmetic numbering (24), that we use today.
For his work in mathematics, Fibonacci was awarded the equivalent of today's Nobel Prize
Fibonacci Summation Series
• The Fibonacci Summation Series takes 0 and adds 1. Succeeding numbers in the series adds the previous two
numbers and thus we have 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89 to infinity. At the eighth series, by dividing 55 by
89, you have the golden mean: .618. If you divide 89 by 55 you have 1.618
• Do you see the pattern? 1+1=2, 1+2=3, 2+3=5, 3+5=8, 5+8=13.....
• These ratios, and several others derived from them, appear in nature everywhere, and in the financial markets
they often indicate levels at which strong resistance and support will be found. They are easily seen in nature
(seashell spirals, flower petals, structure of tree branches, etc.), art, geometry, architecture and music
EWF Page 7
Fibonacci Ratios – Golden Ratio
Ratios /The Golden ratio

• The golden ratio is often called the golden section where the Greek letter phi represents
the golden ratio. Its value is:
EWF Page 8
Fibonacci Ratios – Golden Ratio (Continued)
• An illustration of Golden Ratio can be found from

the rectangle on the left
• A pink rectangle with longer side a and
shorter side b when placed besides a square
with sides of length a will produce a similar
rectangle with longer side a+b and shorter
side of a
• In mathematics, it means
EWF Page 9
Fibonacci Ratios
• 61.8% (0.618) • 261.8% (2.618)

• 100% (1.00) • 323.6% (3.236)
• 123.6% (1.236) • 423.6% (4.236)
Extensions
• 161.8% (1.618) • 681% (6.81)
• 200% (2.00)
• 14.6% (0.146) • 85.4% (0.854)

• 23.6% (0.236)
• 38.2% (0.382)
Retracement
• 61.8% (0.618)
• 76.4% (0.764)
EWF Page 10
Fibonacci Ratios
EWF Page 11
Fibonacci Ratios in nature - Sunflower
EWF Page 12
Fibonacci Sequence in animals – shell of chambered Nautilus
EWF Page 13
Fibonacci Ratios – Human Body
• The white line is the body’s height.

• The blue line, a golden section of the white line,
defines the distance from the head to the finger tips
• The yellow line, a golden section of the blue line,
defines the distance from the head to the navel and
the elbows.
• The green line, a golden section of the yellow line,
defines the distance from the head to the pectorals
and inside top of the arms, the width of the
shoulders, the length of the forearm and the shin
bone
• The magenta line, a golden section of the green line,
defines the distance from the head to the base of the
skull and the width of the abdomen. The sectioned
portions of the magenta line determine the position
of the nose and the hairline
EWF Page 14
Elliottwave Cycle
• Cycles
• Grand supercycle: multi-century
• Supercycle: multi-decade (about 40–70 years)
• Cycle: one year to several years (or even several decades under an Elliott Extension)
• Primary: a few months to a couple of years
• Intermediate: weeks to months
• Minor: weeks
• Minute: days
• Minuette: hours
• Subminuette: minutes
EWF Page 15
Elliottwave Cycle
Elliottwave Degree
is Elliottwave’s language
to identify cycles so that
analyst can identify
position of a wave within
overall progress of
market
EWF | August 2016 16

Elliottwave Structure - Impulse
• Impulse wave subdivide into 5 waves
• Wave 1, 3, and 5 subwaves are themselves
impulse
• Wave 2 can’t retrace more than the
Rules beginning of wave 1
• Wave 3 can’t be the shortest
• Wave 4 can’t overlap with wave 1
• Wave 5 needs to come with RSI divergence
• Wave 2 = 50%, 61.8%, 76.4%, or 85.4% of

wave 1
• Wave 3 is typically 161.8% of wave 1-2, but
Fibonacci can also be 200%, 261.8%, 323.6% of wave
Relationship 1-2
• Wave 4 = 14.6%, 23.6% or 38.2% of wave 3
but no more than 50%
• Wave 5 = wave 1 or 61.8% of wave 1-3, or
123.6% - 161.8% of wave 4

Wave Personality – Wave 1 & 2

Wave Personality –Wave 1 & 2 (continued)
• Wave 1: Wave one is rarely obvious at its inception. When the first wave of a new bull market begins,
the fundamental news is almost universally negative. The previous trend is considered still strongly
in force. Fundamental analysts continue to revise their earnings estimates lower; the economy
probably does not look strong. Sentiment surveys are decidedly bearish, put options are in vogue,
and implied volatility in the options market is high. Volume might increase a bit as prices rise, but
not by enough to alert many technical analysts
• Wave 2: Wave two corrects wave one, but can never extend beyond the starting point of wave one.
Typically, the news is still bad. As prices retest the prior low, bearish sentiment quickly builds, and
"the crowd" haughtily reminds all that the bear market is still deeply ensconced. Still, some positive
signs appear for those who are looking: volume should be lower during wave two than during wave
one, prices usually do not retrace more than 61.8% (see Fibonacci section below) of the wave one
gains, and prices should fall in a three wave pattern

Wave Personality –Wave 3

Wave Personality – Wave 3 (Continued)
• Wave 3: Wave three is usually the largest and most powerful wave in a trend (although some research suggests
that in commodity markets, wave five is the largest). The news is now positive and fundamental analysts start to
raise earnings estimates. Prices rise quickly, corrections are short-lived and shallow. Anyone looking to "get in
on a pullback" will likely miss the boat. As wave three starts, the news is probably still bearish, and most market
players remain negative; but by wave three's midpoint, "the crowd" will often join the new bullish trend. Wave
three often extends wave one by a ratio of 1.618:1
• Wave 3 rally picks up steam and takes the top of Wave 1. As soon as the Wave 1 high is exceeded, the stops are
taken out
• Depending on the number of stops, gaps are left open. Gaps are a good indication of a Wave 3 in progress. After
taking the stops out, the Wave 3 rally has caught the attention of traders

Wave Personality – Wave 4
• At the end of wave 4, more buying sets in and

prices start to rally again
• Wave 4: Wave four is typically clearly

corrective. Prices may meander sideways for an
extended period, and wave four typically
retraces less than 38.2% of wave three. Volume
is well below than that of wave three. This is a
good place to buy a pull back if you understand
the potential ahead for wave 5. Still, fourth
waves are often frustrating because of their lack
of progress in the larger trend.

Wave Personality –Wave 5
• Wave 5: Wave five is the final leg in the direction of the dominant trend. The news is almost universally
positive and everyone is bullish. Unfortunately, this is when many average investors finally buy in,
right before the top. Volume is often lower in wave five than in wave three, and many momentum
indicators start to show divergences (prices reach a new high but the indicators do not reach a new
peak). At the end of a major bull market, bears may very well be ridiculed (recall how forecasts for a
top in the stock market during 2000 were received)
• The wave 5 lacks huge enthusiasm and strength found in the wave 3 rally. Wave 5 advance is caused by
a small group of traders
• Although the prices make a new high above the top of wave 3, the rate of power or strength inside wave
5 advance is very small when compared to wave 3 advance

Wave Personality – Wave A, B, and C
• Wave A: Corrections are typically harder to identify than impulse moves. In wave A of a bear market, the
fundamental news is usually still positive. Most analysts see the drop as a correction in a still-active bull market.
Some technical indicators that accompany wave A include increased volume, rising implied volatility in the
options markets and possibly a turn higher in open interest in related futures markets
• Wave B: Prices reverse higher, which many see as a resumption of the now long-gone bull market. Those
familiar with classical technical analysis may see the peak as the right shoulder of a head and shoulders reversal
pattern. The volume during wave B should be lower than in wave A. By this point, fundamentals are probably
no longer improving, but they most likely have not yet turned negative
• Wave C: Prices move impulsively lower in five waves. Volume picks up, and by the third leg of wave C, almost
everyone realizes that a bear market is firmly entrenched. Wave C is typically at least as large as wave A and
often extends to 1.618 times wave A or beyond

Elliottwave Structure – Impulse with Extension
EWF | August 2016

25
Elliottwave Structure – Impulse with Extension
• Extension is elongated impulse with
exaggerated subdivision
• Extension happens in one of the impulse
subwaves, either in wave 1, 3, or 5
• Extension frequently happens in the third
Rules
wave
• Same rules of impulse apply to the
extended impulse subwaves
• Same Fibonacci relationship between

waves in Impulse also apply to the
Fibonacci extended wave 3 subwaves
Relationship

Elliottwave Structure – Ending Diagonal
Rules
• Special type of wave mostly appearing

in the fifth wave of an impulse
• It can also appear in wave C of a zigzag
• Characterized by overlapping wave 1

and 4 and the wedge shape
• Usually found in termination point of

a larger pattern
• Each subwave is subdivided into three

(3-3-3-3-3)

Elliottwave Structure – Leading Diagonal
Rules
• Special type of wave appearing in

the first wave of an impulse
• It can also appear in wave A of a

zigzag
• Characterized by overlapping wave

1 and 4 and the wedge shape
• Subdivision can be 5-3-5-3-5 or 3-

3-3-3-3

Elliottwave Structure - Zigzag
• A corrective 3 waves labelled as ABC
• Subdivision of wave A and C are impulse /

diagonal
Rules
• Wave B can be any corrective structure
• Zigzag is 5-3-5 structure
• Wave B = 50%, 61.8%, 76.4% or 85.4% of

wave A
Fibonacci • Wave C = 61.8%, 100%, or 123.6% of wave A
Relationship
• If wave C = 161.8% of wave A, it can be an

impulse

Elliottwave Structure - Flats
Regular Flat Irregular / Expanded Flat Running Flat

Elliottwave Structure – Regular Flat

• Subdivision of wave A and B are 3 waves
• Subdivision of wave C is impulse / diagonal
• Wave A and B can be any corrective structure
Rules • Flat is 3-3-5 structure
• Wave B does not retrace more than the
beginning of wave A
• Wave C needs to have RSI divergence
• Wave B = 50%, 61.8%, 76.4% or 85.4% of

wave A
Fibonacci
Relationship
• Wave C = 61.8%, 100%, or 123.6% of wave AB

Elliottwave Structure – Irregular (Expanded) Flat

• Wave B retrace more than the beginning of
wave A
• Wave B = 123.6% of wave A
Fibonacci • Wave C = 123.6% or 161.8% of wave AB

Relationship

Elliottwave Structure – Running Flat

• Wave B retrace more than the beginning of wave
A
• Wave C does not pass wave A
• Wave B = 123.6% of wave A
Fibonacci • Wave C = 61.8% or 100% of wave AB

Relationship

Elliottwave Structure – Triangle
Ascending Triangle Descending Triangle Symmetrical Triangle Expanding Triangle
Bullish
Market
Ascending Triangle Descending Triangle Symmetrical Triangle Expanding Triangle
Bearish
Market

Elliottwave Structure – Triangle
Rules
• Corrective structure labelled as

ABCDE
• Usually happens in wave B or

wave 4
• Subdivided into three (3-3-3-3-3)
• RSI also needs to support the

triangle in every time frame
• Subdivision of ABCDE can be

either ABC, WXY, or Flat

Elliottwave Structure – Double Threes
• A combination of two corrective structures

labelled as WXY
• Wave W and Y subdivision can be abc, wxy,

wxyz
Rules
• Wave X can be any corrective structure
• WXY is a 7, 15, or 23 swing structure
• Wave X = 50%, 61.8%, 76.4% or 85.4% of

wave W
Fibonacci
Relationship • Wave Y = 61.8%, 100%, or 123.6% of wave W
• Wave Y can not pass 161.8% of wave W

Elliottwave Structure – Double Threes
• A combination of two corrective structures

labelled as WXY
The most common structure!
• Wave W, X, and Y subdivision is a wxy
Rules • WXY is a 7 swing structure
• Wave X = 50%, 61.8%, 76.4% or 85.4% of wave

W
Fibonacci
Relationship • Wave Y is commonly 100%, or 123.6% of wave W

Elliottwave Structure – Triple Correction
• A combination of three corrective structures

labelled as WXYZ
• Wave W, Y subdivision can be abc, wxy, or

wxyz
Rules
• Wave X can be any corrective structure
• WXYZ is an 11 swing structure minimum
• Wave X = 50%, 61.8%, 76.4% or 85.4% of

wave W
Fibonacci
Relationship • Wave Y = 61.8%, 100%, or 123.6% of wave W

2. Cycles, Sequences & Correlation
Trend and Cycle
• When a cycle is intact, trend within that cycle stays the same
• When a cycle ends, then expect a correction of the cycle in 3, 7 or 11 swings or

a trend change
• Cycle generally ends after 3 swing and equal leg (100% - 123.6% extension)
• A bullish cycle = a sequence of higher highs and higher lows
• A bearish cycle = a sequence of lower highs and lower lows
• Different degrees of cycle (Long term, medium term, short term)
• RSI and trend line channel can be used to determine a cycle

Relative Strength Index (RSI)
• The Relative Strength Index (RSI) is a technical indicator used in the analysis of financial markets. It is intended to chart the current
and historical strength or weakness of a stock or market based on the closing prices of a recent trading period. The indicator should
not be confused with relative strength
• The RSI is classified as a momentum oscillator, measuring the velocity and magnitude of directional price
movements. Momentum is the rate of the rise or fall in price. The RSI computes momentum as the ratio of higher closes to lower
closes: stocks which have had more or stronger positive changes have a higher RSI than stocks which have had more or stronger
negative changes
• The RSI is most typically used on a 13 day timeframe, measured on a scale from 0 to 100, with high and low levels marked at 70 and
30, respectively. Shorter or longer timeframes are used for alternately shorter or longer outlooks. More extreme high and low
levels—80 and 20, or 90 and 10—occur less frequently but indicate stronger momentum
• For each trading period an upward change U or downward change D is calculated. Up periods are characterized by the close being
higher than the previous close
• The RSI can be used together with EWP and become a more powerful tool

2. Cycle, Sequences & Correlation
Relative Strength Index (continued)
• Market runs in cycles and the cycles can be seen within the RSI
• A downtrend will be a sequence of lower lows and lowers highs, the trend should be down until the sequence
happens
• An uptrend is a sequence of higher high and higher lows
• If the market is in Impulse then the w4 pick can pass the beginning of wave 3 but cannot pass the beginning of the
cycle
• If the market is moving corrective then the sequence need to be intact and the relationship should be intact
• A break of the sequence in a corrective move is a change of trend or the end of the internal cycle
• Wave 5 in a motive wave need to provided divergence and need to be seen in every time frame within the RSI ,
• Each subdivision of the motive waves need to provided divergence
• 3 waves move do not provided divergence and should not pass the beginning of ruling cycle
• Flats can pass beginning of the ruling cycles

Relative Strength Index (Continued)
Divergence
• Wilder further believed that divergence between RSI and price action is a very strong indication
that a market turning point is imminent. Bearish divergence occurs when price makes a new high
but the RSI makes a lower high, thus failing to confirm. Bullish divergence occurs when price
makes a new low but RSI makes a higher low

Stochastic RSI
• Developed by Tushard Chande and Stanley Kroll, StochRSI is an oscillator that measures the level
of RSI relative to its high-low range over a set time period. StochRSI applies the Stochastics formula
to RSI values, instead of price values. This makes it an indicator of an indicator. The result is an
oscillator that fluctuates between 0 and 1
• In their 1994 book, The New Technical Trader, Chande and Kroll explain that RSI can oscillate
between 80 and 20 for extended periods without reaching extreme levels. Notice that 80 and 20 are
used for overbought and oversold instead of the more traditional 70 and 30. Traders looking to enter
a stock based on an overbought or oversold reading in RSI might find themselves continuously on the
sidelines. Chande and Kroll developed StochRSI to increase sensitivity and generate more
overbought/oversold signals

Stochastic RSI (Continued)
• A 5 wave structure is shown in 3 swings which goes from low to high to low and divergence in bullish
motive wave or high to lows to high and divergence in bearish motive wave
• Indicator become useless in wave 3 of a motive wave

7 swing sequence

Five waves sequence

Trend and Cycle - WXY structure
QUIZZ
• What is the trend

in the cycle from
April 15 low to Aug
1 high?
• Find the different

cycles from the
chart

2. Cycle, Sequences & Correlation
Trend and Cycle – WXY structure
text
Text
7 Short Term cycles within the cycle 3 Medium Term cycles within the A bullish cycle from April 15 low to Aug 1
from April 15 low to Aug 1 high cycle from April 15 low to Aug 1 high high in the form of a double three WXY

Trend and Cycle – Impulse structure
QUIZZ
• What is the trend

in the cycle from
April 15 low to Aug
1 high?
• Find the different

cycles from the
chart

2. Cycles, Sequences & Corrleation
Trend and Cycle – Impulse structure
text
Text
17 Short Term cycles within the cycle 5 Medium Term cycles within the cycle A bullish cycle from April 15 low to Aug 1
from April 15 low to Aug 1 high from April 15 low to Aug 1 high high in the form of impulse

Trend Line Channel & RSI
• A cycle is trading within an established trend channel in price & RSI
• When a trend channel breaks (either in price or RSI), it’s an early indication that the cycle may have
ended and a new cycle may begin

Trend Line Channel and RSI
• 3 trend line channels from (y) low

to w high
• When the first blue trend channel

is broken to the downside in price
and/or RSI, it suggests that cycle
from (y) low may have ended
• When the second red trend

channel is broken to the upside in
price and/or RSI, it suggests cycle
from ((W)) high may have ended
• Both price and RSI make a higher

high and higher low sequence

Trend Line Channel and RSI
• Cycle from Sep 2013 peak is

unfolding as 5 waves with RSI
divergence
• Trend channel in RSI breaks

and RSI 2 > RSI 1
• Wave v is likely complete and

thus bearish cycle from Sep
2013 peak is over

Common Fibonacci Retracements and Extensions
• Common Fibonacci Retracement

a) 23.6% - 38.2% is used for wave 4
b) 50% - 61.8% is the most common. Used for wave 2, B or X
c) 76.4 – 85.4% (deep retracement) can be wave 2, or B of a FLAT
• Common Fibonacci Extension

a) 100% - 123.6% is the most common. Often called equal leg area. Used
for wave C=A, Y=W, Z=W, and 5=1
b) 161.8% is used for wave 3
RULE OF THUMB
1. A cycle generally ends in 3 swing at 100% - 123.6%

2. After a cycle ends, expect a correction in 3, 7 or 11 swings

Fibonacci Retracement and Extension
• In the cycle from April 15 low to June 1

high, wave ((y)) is equal in length to
wave ((w))
• In the cycle from June 15 low to August 1

high, wave ((y)) is equal in length to
wave ((w))
• In the larger degree cycle from April 15

to Aug 1, wave Y is equal in length to
wave W
RULE OF THUMB
A cycle generally ends in 3 swing at 100% - 123.6%

Cycles and Corrections
• After cycle from April 15 low to June 1 high

ended as wave W, a new cycle in wave X
begins to correct the rally from April 15 –
June 1 and unfolds in 3 swings.
• After cycle from April 15 low to Aug 1 high

ended (the full WXY), a new cycle begins to
correct the rally from April 15 – Aug 1 and
again unfolds in 3 swings.
RULE OF THUMB
After a cycle ends, expect correction in 3, 7 or 11 swings.

Fibonacci Retracement and Extension
• Medium term cycle from March 1995 peak to

August 1997 low ended with wave (w). It ended
at equal leg area where wave y = wave w. The
blue arrows show the equality
• After cycle from March 1995 – Aug 1997 is

over, pair corrects the cycle in wave (x) to a
little bit over 61.8% retracement, ending on
Oct 1998
• After 61.8% retracement, pair continues wave

(y) to a new low towards equal leg area where
wave (y) = wave (w). The red arrows show the
equality. Larger degree cycle from March 1,
1995 to Oct 2000 ended.
• From Oct 2000 low, pair again corrected 50%

of the decline from March 1995 – Oct 2000

Market Correlation
• Market correlation is key and needs to be used in the right way or group
• Major groups in the Market

o USDX – EURUSD ,GBPUSD, USDCAD ,USDNOK,USDJPY, USDCHF,USDSEK,USDPLN.
o Commodities currencies – AUDUSD, NZDUSD, USDCAD
o Indexes – SPX, DAX, FTSE, S&P, ES_F, DJIA, Nasdaq, RUSSEL, AAPL, FTSE, DAX, IBEX,
Eurostoxx50, NIKKEI, ASX, Hangseng, TASI, NIFTY
o Yen group – USDJPY, GPBJPY,EURJPY,AUDJPD,CADJPY,NZDJPY,CHFJPY, TNX
o Commodities- Gold, silver, Copper, Oil, NATGAS, Soybean, Corn, Sugar, Wheat, Coffee

Market Correlation
• The correlation of the market has a natural direction which is what we call a fixed market in this case
the Indexes, Commodities, USD pairs, and YEN trade in the same direction. When the market is not
fixed usually the YEN trade with the Indexes and also with the USD in this case the dollar pairs and
Commodities trade inverse to the Yen and Indexes group
• Types of correlations:
o First dimension (When the groups agree in directions and swings.)
o Second dimensions ( When the agreed in swings but not in direction.)

Time, Price and Distribution
• Time, Price & Distribution are 3 key
elements in the market.
• Price is always moving in the market but

doesn’t always move the same way and
neither at the same speed, nor
distribution.
• A 100 pip move can have a different

effect on the cycles based on the internal
distribution in the move.
• In Elliottwave Theory, corrections

should be comparable in time.
• In April 2015, EURUSD ended cycle

from peak of correction 3 suggesting
price should remain supported into a
correction 4 or new cycle because of the
time factor (for 48 – 93 weeks at least)

3. Risk Management
Psychology - Trading Discipline
• Trading with discipline is the key to success in trading. A discipline approach help you avoid getting
caught up in the emotions of trading that often lead to unplanned, risky devastating moves. What often
separates profitable traders in from those that lose money is often their ability to cut losses. This is the
hardest lesson for many traders to learn. By limiting your losses on opportunity ,also proper money
management and understanding of Human nature will help you better

3. Risk Management
Psychology - Trading Discipline
• Mastering the psychology of trading is one of the most difficult, yet under appreciated, elements of
learning how to trade , regardless of whether on trading part-time from home or trading professional
for a living
• This could be due to the fact that most technical traders, such as day traders and swing traders, tend to
be more mathematically or fundamental oriented
• Yet, to ignore the psychology of trading will almost guarantee your failure in learning how to be a
consistently profitable trader

3. Risk Management
Psychology - Illusions
• An illusion as a distortion of the senses, revealing how the brain normally organizes and interprets
sensory stimulation. Though illusions distort real they are generally shared by most people.[1] Illusions
may occur with any of the human sense but visual illusions (optical illusions), are the more well-known
and understood. The emphasis on visual illusions occurs because vision often dominates other senses.
For example, individuals watching ventriloquist will perceive the voice is coming from mouth the
words

3. Risk Management
Psychology – Identifying weaknesses
• Since the market is made up of individual human beings who tend to act in similar manners, a group is
formed. It is only the group’s opinion that matter during a trend, but it is the individual trader’s job to
identify the subtle clues as to when a market is going to shift direction
• The clues are there, but they are subtle. An awareness and detailed understanding of these emotions is
what keeps the astute technical trader individual weaknesses. We shall now take a closer look at these
emotions, and provide examples of how they influence a trader’s ability to consistently make money

3. Risk Management
Psychology – 3 Types of Emotions
There are three psychological states of emotions that drive most individual decision making in any
market in the world:
1. Greed
2. Hope
3. Regret

3. Risk Management
Psychology – Greed
What is greed?
• Greed is commonly defined as an excessive desire for money and wealth
• In trading terminology, it can specifically be defined as the desire for a trade to provide an
immediate and unrealistic amount of profit. When greed sets in, all a trader can focus on is how
much money they have made and how much more they could make by staying in the trade.
However, there is actually no profit made until a position is closed. Until then, trader only has
POTENTIAL profit (aka. “paper profit”). Greed also frequently leads to ignoring sound risk
management practices

3. Risk Management
Psychology – Fear
What is Fear?
• Fear is the emotion that traders and investors struggle with more than the three emotions (Greed,
Hope, Regret)
• Fear is defined as a distressing emotion that is caused by a feeling of impending danger, which results
in a survival response. This holds true regardless whether the threat is real or imagined
• Fear is probably the most powerful of all human emotions. When traders panic, it leads to poor
decision making. Fear is a survival response

3. Risk Management
Psychology – Hope
What is Hope?
• Hope is a feeling of expectation and desire for a certain thing to happen. It’s an individual’s desire to want or wish
for a desired event to happen
• Hope may be the most dangerous of all human emotions when it comes to trading. Hope is what keeps a trader in a
losing trade after it has hit the stop. Greed and hope are what often prevent a trader from taking profits on a
winning trade. In a losing trade, when a market instrument is going against them, traders will often remain in the
trade instead of closing the trade as advised. Many traders would stay in the trade hoping for it to get back to break-
even. Every swing trader hopes that a losing trade will somehow become a winning trade or at least get beyond the
entry level, but markets care less about what you (trader) hope for and what is in your best interest. Rest assured,
when your thinking slips it goes into Hope mode, the market will punish you by taking your money

3. Risk Management
Psychology – Regret
What is Regret?
• Regret is defined as a feeling of sadness or disappointment about something that has happened or
been done, especially when it involves a loss or a missed opportunity
• The negative implications of this emotion are obvious. It is only natural for a trader to regret taking on
a losing trade or missing a winning trade. But what is important as a trader is to hyper focus on losing
trades or missed opportunities. If you lose and are wrong, move forward. Other than the lessons that
can be gained from evaluating each trade, there is no point to spending further time regretting the
decision to enter the trade. It is also a human nature to feel regret when an opportunity is missed. If
you miss a winning trade, then you must move on to the next potential trading opportunity

3. Risk Management
Psychology – Regret (continued)
• When technical traders allow regret to rule their thinking, they tend to “chase trades” in the hopes of
still being able to make money by entering into a position well above the trigger price. The problem
with this thinking is that the reward/risk of the trade no longer meets the parameters of a good trade
management. For instance, by entering at a trading point higher than the trigger, the potential reward
may be a point of consideration, but so should be the potential loss. This sets reward/risk ratio at 1 to
1.
• Recall we prefer entering trades at the appropriate trigger price. The reward/risk ratio would have
been 2 to 1 at least. Successful and profitable traders learn to discipline their mind to eliminate
regretful thinking

3. Risk Management
Money Management
• Money management is the mathematical process of increasing and decreasing the number of
contracts/shares/position size. The purpose of utilizing money management should be to increase
profitability during positive runs and protect those profits during drawdowns of any trading system /
method
• The good thing about money management is the fact that money management is purely a function of
math. A hundred years ago, two + two = four. Today, that equation yields the same answer. Therefore,
money management is predictable unlike trading strategies or systems. In the exam, 50 tails first and
then 50 heads, the outcome would be the same as if you heads first and then suffered the 50 losing
tails. You may be skeptical of these numbers at first, but I assure you, the numbers are correct

3. Risk Management
Money Management (continued)
• The risk aspect of trading is a very unique and important part of your trading career. A trader needs to understand
that only risking the same percent of your equity per trade is the only way that the math will be in your favor
• The idea is the trader understands that trading is about probabilities. Consequently something needs to be
constant in your daily trading which is the risk / trade. The stop loss is always different in each trade, but the same
percent of risk each time makes the equation works
• Our suggestion is risking between one or two percent of your equity per trade. Using the following formula you
will determine the amount of money you will risk per day. Total equity x (1 or 2%) = Amount of money risked per
trade divided by size of stop loss divided by pip cost = position size
• Let’s take a look at an example. Equity = $5000 and if you decided to risk 2% on the trade. $5000 x 2% = $100.
So $100 is amount of money you would be risking on the trade. If stop loss required is 50 pips, it gives you 100/50
= 2. If pip cost is $1 per mini lot (for example EURUSD). That means you can trade 2 mini lots of EURUSD pair.
If pip cost is $1.2913 per mini lot (for example EURGBP). That means you can trade 1.548 mini lots.

3. Risk Management
• We recommend taking trades which provide minimum of 2 to 1 ratio when we compare the size of the money in
risk with the profit when the limit or target is hit. With a risk to reward of 1 to 2, you will break-even with a win-
loss ratio of 33.33%. In other words, to end up profitable, you would need a win ratio above 33.33% which seems
pretty reasonable.
• If you use a risk reward ratio of 1 to 3, you will break-even with a win-loss ratio of 25%. So let’s say if you are right
just 30% of the times, you will still be profitable.
• On the other hands, if you used a risk to reward ratio of 1 to 1, you would need to have a win-loss ratio of more
than 50% to be profitable.
• To conclude, better the risk to reward ratio, lower the win-loss ratio required to be profitable.

3. Risk Management

3. Risk Management
Money Management (Risk per trade)
Performance Graph of 4 traders using exact same trade setups, having same entries, stop losses and take profit
targets. All using a risk / reward ratio (1:2) and having same initial capital of $50,000 but all taking different risks.

3. Risk Management
Purple trader risked

25% per trade, lost
the first 2 trades and
ended up losing
43.75% of his equity.
Got dis-hearted and
quit trading

3. Risk Management
Red trader took risks

randomly. Started
off with 10% and
lower the risk after
he lost a trade and
increased risk after
he won a trade. After
20 trades, he ended
up losing 33.64% of
his starting equity.

3. Risk Management
Green took wild risks

randomly and
turned out to be
lucky and even
ended with 36.85%
profit after 20
trades. This is not
the right way to
trade as it doesn’t
follow a system and
can result in loss of
all the equity sooner
or later.

3. Risk Management
Blue trader always

risked 2% and never
altered it after he
won or lost a trade.
He ended up making
16.56% profit on his
starting equity after
20 trades. This is
how professionals
trade

3. Risk Management
• The market and trading consequently is nothing more than a probability profession and understanding
that idea makes us believe that the less that you touch the position after the market hits the entry it is
the better. Consequently we believe in the idea of winning or misery in where a trade is not touched
until it reaches the extreme of the limit or stop.
• One technique that can be used is understanding the areas in which the other side of the market can be
presented and we recommend covering your position to break even at the moment in which the fifty
percent retracement of the previous leg has been reached into the new cycle. We only recommend this
technique if your entry was between the 1.00 and 1.236 of the previous ratios

4. Trading Execution
• The market is a probability scenario in which the execution of the trader is a huge part of the success. 95% of traders
end up losing their equity after less than a year in the profession. There are many factors into the reason why most
traders fail after one year. But the execution is the biggest one like we always say it’s a probability field so the trader
needs to understand that only repeating the same technique makes you succeed because nobody calls the market
perfect
• Nobody will ever call the market perfect. Understanding that your opinion not always is the right one is the key to
success by adjusting when your opinion is wrong is also another key to success. In previous segments we spoke about
money management which is related to execution. For the right execution the trader needs to understand the two
different sequence of the market.
 Impulse sequence: 5 - 9 - 13 - 17
 Corrective sequence: 3 - 7 - 11 - 15
• Understanding these two sequence and understanding that the market has different sequence and time frames
makes the trader locate the trend which at the end is the only way to be successful

Motive vs Corrective Sequence
Motive Corrective
• Waves that move in the sequence • Waves that move in the sequence
of 5-9-13-17 and so on swings. of 3-7-11 and so on swings. Can be
seen in both trending and
correcting markets.
Definition • An example is Impulse • Examples are zigzag, flat,

triangles, double threes, triple
threes
• Cycle has an incomplete sequence
unless Impulse wave C of a FLAT. • Cycle can be complete
• 5-9-13-17-21-25 - … in a sequence • 3-7-11-15-19-23 - … in a sequence

Sequence
with increments of 4 with increments of 4

Motive Sequence – Impulse
Figure 1 Figure 2
QUIZZ
Count the
swings in Figure
1 and Figure 2
----------------------
Motive
Sequence:
5, 9, 13, 17, …

Corrective Sequence – Zigzag
Figure 1 Figure 2
QUIZZ
Count the
number of
swings in Figure
1 and Figure 2
----------------------
Corrective
Sequence:
3, 7, 11, 15, …

Corrective Sequence – Double Threes
Figure 1 Figure 2
QUIZZ
Count the
number of
swings in Figure
1 and Figure 2
----------------------
Corrective
Sequence:
3, 7, 11, 15, …

Swing Sequence - Triple Threes vs Impulse
Triple Three Impulse
• 11 swing sequence • 5 waves (17 swing) sequence

• Corrective subdivision • Impulse subdivision
• Wave Y = Wave W • Wave 3 = 161.8% x Wave 1
• No RSI divergence in wave Z • Has RSI divergence in wave 5

Corrective Sequence – Triple Threes
Figure 1
Figure 2
Figure 1 is NOT 5 swing!
QUIZZ
Count the
number of
swings in Figure
1 and Figure 2
----------------------
Corrective
Sequence:
3, 7, 11, 15, …

• The idea is using all the tools that we have taught for the previous hours to get to the most important part the
execution. The way we going to do it is locating either extremes (which is an area in which buyers and sellers agree
that in old sequence have to end and the new sequence have to begin)
• The extreme trade is in Elliottwave called as Elliottwave hedging in which the buyers and sellers either after five
waves make three or after three waves make three. Usually the hedging happen at the 100% or 1.236 of a three
ways. This technique has a higher success ratio because the entry occurs in the no enemy area because sellers and
buyers agree in the area. When we locate the extreme area, we are going to locate the sequences starting from the
yearly chart or higher degree going down to the one minute sequence and we are going to always trade the sixth
swing or in complete sequence. Another important aspect within the execution is the correlation in which a trader
asks a chess player we subdivide the market in different group and locate the incomplete or the extreme sequence

• The market does not always work in sync so it’s important to understand the groups, the sequences and the
extremes. So the idea is when any sequence is incomplete, locate within the group which one is lagging into the
sequence and trade that instrument .
• Look at crosses and majors to find the best instrument to trade in each direction. For example under current
circumstances, GBPAUD is reaching 100% extension from August 2015 peak and a bigger 3 wave bounce should
happen soon. To trade that bounce, buying GBPAUD or selling AUDUSD is not a good trade. So, we need to look for
an instrument which should trade in the same direction but is showing an incomplete sequence in the same
direction. For example, in this instance, an instrument like USDCAD is showing 5 swings from 5.3.2016 low and
hence instead of buying GBPAUD or selling AUDUSD, a trader could buy USDCAD when the other two reach the
extreme as far as pivot at 6.8.2016 low remains intact.

- Execution is related to discipline and patience. A trader needs to be a hunter and waiting for the market to come to
us and have a plan and execute the plan. Also, the following things can’t be done if you want to succeed in your
trading:
› Chasing the market in the middle of the sequence
› Trading into bounces or pull back against the sequence
› Over leverage the position
› Open the stop or running a losing position
› Trading against the higher degree sequence ( only when the lesser degree has five swings you can trade into the
seventh)

Trade Selection
1. Trade in direction of the trend. If all instruments in a group are calling for a pull back and extension higher or lower.
Buy / Sell the ones which are already showing an incomplete sequence to the upside / downside.
Example, Indices and Yen pairs completed a cycle from 6.24.2016 low and were expected to pull back and extend
higher. You should have picked SPX or INDU (Dow) to buy in the dips and not the rest because both were showing
incomplete sequences i.e. INDU (Dow) 9 swings up from 8.24.2015 and SPX 5 swings up from 2.11.2016 low.
2. Within the group, pick the instrument which is lagging.
3. If 2 instruments are showing incomplete sequences and one turns into a FLAT correction while the other one takes
the form of a simple ABC or WXY. Pick the one showing the simple correction as wave C in a FLAT sometimes can
extend making things tricky. For example, Dow pulled back in 7 swings (WXY) structure to 100 – 123.6 extension area
from 7.20.2016 peak while SPX turned into a FLAT which made Dow the better choice.

Trade Selection
4. Look at the structure and sequences in crosses to help determine which pair to trade within the group.
For example, if USDX is expected to trade lower because of an incomplete sequence and you want to sell USDX. To
decide whether you should buy EURUSD or GBPUSD, look at EURGBP. If EURGBP is showing a bullish structure and
sequence, pick EURUSD. If EURGBP is showing a bearish structure and sequence, pick GBPUSD.
Another example is if AUDUSD and NZDUSD 4 hour and daily trend is bullish and they are reaching an extremes from
May lows and expected to make a larger 3 wave pull back. Instead of selling these 2 instruments, we need to look for an
instrument which should trade in the same direction but is showing an incomplete sequence in the same direction. In
this instance, an instrument like USDCAD is showing 5 swings from 5.3.2016 low and hence instead of selling AUDUSD
or NZDUSD, we could buy USDCAD in 3, 7 or 11 swings as far as pivot at 6.8.2016 low remains intact.

Trade Selection
4. Look at the structure and sequences in crosses to help determine which pair to trade within the group.
For example, if USDX is expected to trade lower because of an incomplete sequence and you want to sell USDX. To
decide whether you should buy EURUSD or GBPUSD, look at EURGBP. If EURGBP is showing a bullish structure and
sequence, pick EURUSD. If EURGBP is showing a bearish structure and sequence, pick GBPUSD.
Another example is if AUDUSD and NZDUSD 4 hour and daily trend is bullish and they are reaching an extremes from
May lows and expected to make a larger 3 wave pull back. Instead of selling these 2 instruments, we need to look for an
instrument which should trade in the same direction but is showing an incomplete sequence in the same direction. In
this instance, an instrument like USDCAD is showing 5 swings from 5.3.2016 low and hence instead of selling AUDUSD
or NZDUSD, a trader could buy USDCAD when the other two reach the extreme as far as pivot at 6.8.2016 low remains
intact.

Trading Technique
1. Always buy/sell equal legs (100% extension ) in 3-7-11 swings

It is recommended to always enter with the full position because when losing, you lose with full
position. Similarly, when you win, you need to win with full position to keep the ratios in your favor.
Other Entry levels can be 1.236 or the average of 1.00 & 1.236 which is 1.118
2. STOP below the 1.618 extension of 3-7-11 swing
3. Look for a set up in higher degree and execute in lesser degree
4. Take Half Profit at 50% of A-B or W-X and take the rest of profit at equal legs
5. If escalating, enter with ½ position at 1st level and other ½ at 2nd position. If 2nd position is not filled, then as soon
as there is indication that corrective cycle is over, look to add the other ½ position on the 1st pull back to create a
full position

Trading Technique (continued)
6. a) If taking trades in 1 or 4 hour time frame, protect position by moving stop loss to break even at the moment in
which the fifty percent retracement of the previous leg (wave C or Y) has been reached into the new cycle. We only
recommend this technique if your entry was between the 1.00 and 1.236 of the previous ratios.
b) If trading on a higher time frame like the daily chart, it’s better to use winning or misery and move
stop loss to break even only when high / low of previous cycle has been broken.
7. Book profits at first equal leg target. Whichever comes first, whether (( c )) = (( a )) within Y or W = Y
8. Always trade with the trend.
9. Trade counter trend only when there are 5 swings into the correction or first leg was a 5 wave move
(which doesn’t obviously appears to be part of a FLAT structure)

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www.elliottwave-forecast.

The New Elliottwave,

Presented by: Eric Morera and Hendra Lau

August 13, 2016

• Elliottwave Theory history and nature • Trend and cycle

EWF | August 2016 2

EWF | August 2016

EWF | August 2016

Ratios /The Golden ratio

• An illustration of Golden Ratio can be found from

• 61.8% (0.618) • 261.8% (2.618)

• 14.6% (0.146) • 85.4% (0.854)

• The white line is the body’s height.

EWF | August 2016 16

• Wave 2 = 50%, 61.8%, 76.4%, or 85.4% of

EWF | August 2016 17

EWF | August 2016 18

EWF | August 2016 19

EWF | August 2016 20

EWF | August 2016 21

• At the end of wave 4, more buying sets in and

• Wave 4: Wave four is typically clearly

EWF | August 2016 22

EWF | August 2016 23

EWF | August 2016 24

EWF | August 2016

• Same Fibonacci relationship between

EWF | August 2016 26

• Special type of wave mostly appearing

• It can also appear in wave C of a zigzag

• Characterized by overlapping wave 1

• Usually found in termination point of

• Each subwave is subdivided into three

EWF | August 2016 27

• Special type of wave appearing in

• It can also appear in wave A of a

• Characterized by overlapping wave

• Subdivision can be 5-3-5-3-5 or 3-

EWF | August 2016 28

• Subdivision of wave A and C are impulse /

• Zigzag is 5-3-5 structure

• Wave B = 50%, 61.8%, 76.4% or 85.4% of

• If wave C = 161.8% of wave A, it can be an

EWF | August 2016 29

Regular Flat Irregular / Expanded Flat Running Flat

EWF | August 2016 30

• A corrective 3 waves labelled as ABC

• Wave B = 50%, 61.8%, 76.4% or 85.4% of

EWF | August 2016 31

• A corrective 3 waves labelled as ABC

• Wave B = 123.6% of wave A

Fibonacci • Wave C = 123.6% or 161.8% of wave AB

EWF | August 2016 32

• A corrective 3 waves labelled as ABC

• Wave B = 123.6% of wave A

Fibonacci • Wave C = 61.8% or 100% of wave AB

EWF | August 2016 33

Ascending Triangle Descending Triangle Symmetrical Triangle Expanding Triangle

Ascending Triangle Descending Triangle Symmetrical Triangle Expanding Triangle

EWF | August 2016 34

• Corrective structure labelled as

• Usually happens in wave B or

• Subdivided into three (3-3-3-3-3)