How To Set Stops To Protect Your Account

Where do I place my stop? This is a common question and one many traders take some time to figure out. I know I did!

Elliott wave has a nice built in guide for stops. Ideally stops would be set just past the invalidation point for the wave count. When this point is not too far away for comfort it should be a preferred option.

Why just past the invalidation point and not right on it? There are a few reasons for this:

• During market movement price can come to touch an invalidation point which would trigger a stop if it was placed on the point, then bounce right off that point. For example, wave 4 cannot move into wave 1 price territory, but it can touch the end of wave 1. The rule states it cannot move INTO wave 1. Therefore the stop has to be placed at least one pip past the invalidation point.

• Broker spreads can easily close you out. If you set your stop just one pip past the invalidation point your broker spread of 2.5 pips may mean that price actually did not touch your stop when viewed on a price chart, but your stop closed the trade anyway. So take the whole of the broker’s spread into account when setting your stops using invalidation points.

• During news releases the market can make violent swings from one extreme to another in a very short period of time. At these times broker spreads can widen from abut 1.5 pips to 6 or 7 pips, or even more. If the market swings close to or touches an invalidation point and your stop is too close to it your position could be closed for a loss. Only to see the market swing right back the other way. Take this behaviour into account when setting your stops. Allow a little room for those wider broker spreads.

What if the invalidation point is too far away for your comfort? In this situation we can often use channeling techniques to set stops.

Often price movement is nicely contained within a parallel trend channel. My analysis will always use this technique when appropriate. If price moves outside of the channel it is usually an indication that a trend is reversing. Placing stops a few pips outside of the channel prevents your trade from losing too much when the trend changes. Be aware however channeling techniques are not perfect; sometimes channels can have ‘throw overs’ when price flirts with the edge before moving back into the channel.

Impulsive movements conform best to channels especially at minor wave degrees and above. Some corrective structures such as regular flat corrections conform well to channels, and some such as expanded flat corrections do not. Channeling works best on daily charts and often but not always on hourly charts.

When you set your stop always calculate your risk. Multiply the number of pips difference between your opening position and the stop by the size of your trade (in thousands divided by 10).

A couple of examples to illustrate: if I traded a 100K lot and my stop was 69 pips away from my opening position the calculation would be 69 X 10 = $690. So if my stop is triggerd I stand to lose $690. If I was trading a micro account and my trade size was 3K the calculation would be 69 X 0.3 = $20.70. When you know exactly what your risk is in dollar terms you will know whether or not you are comfortable entering that trade with that stop. If your account would incur a margin call before the stop is reached either reduce your leverage by taking a smaller trade, or wait for a better trade set up. Don’t risk a margin call on any trade, ever!

USD Index Elliott Wave Analysis – 30th April, 2010

Elliott Wave chart analysis for the USD Index for 30th April, 2010. Please click on the charts below to enlarge.

With a breach of the lower trend line of the parallel channel containing wave B blue we may have some confirmation that wave B blue is over and wave C blue to the downside has begun.

Our target for the downside to wave 2 black lies in a cluster of points between 79.51 and 79.15; the end of wave 4 of one lesser degree lies at 79.51, wave C blue would reach 1.618 the length of wave A blue at 79.25 and the 0.382 fibonacci ratio for wave 1 black is at 79.15. Therefore this seems like a likely target zone for wave 2 black to reach down to.

This wave count is invalidated with movement above 84.59 or below 74.18.

On the hourly chart we can see a clear five wave down impulse labeled here 1 green. This in addition with a trend channel breach on the daily chart adds weight to the idea that we are in a C wave to the downside.

The last piece of upside movement labeled here A orange could also possibly be seen as a completed second wave to the upside. To see if the correction for a second wave is over here, or not, I have looked more closely at this structure on a 15 minute chart to see if it can be counted as a three (required for a second wave) or a five (which wave A of a correction can break down into).

The most recent movement to the upside is clearly a three wave movement. This is most likely to be wave 2 green complete. A slim possibility exists that it was just wave A orange of a flat correction for wave 2 green that has further upside momentum before it is finished.

A downside target in the short term for the end to the next piece of downwards movement for wave 3 green lies about 80.32. Thereafter a correction up for a fourth wave should develop.

This wave count is invalidated at the hourly level by movement above 82.68.

This article comes to you from forexinfo.us. We use the Elliott Wave Principle to predict market trends and movement.

DJIA Elliott Wave Analysis – 28th April, 2010

Elliott Wave chart analysis for the DJIA for 28th April, 2010. Please click on the charts below to enlarge.

This updated weekly chart sees primary (maroon) wave 2 as over at a high of 11,254. Last posted analysis on this site saw a target of 11,243 which is only 11 points short of the price reached by the Dow.

Within primary 2 ratios are: W and Y are 187 different in length. Wave Z is 137 short of 0.618 the length of wave W.

There is clear divergence between price and an Elliott wave oscillator for waves Y and Z. This may indicate that if the upside trend is not over here, it may be over very soon.

I would wait for a breach in the lower trend line of this parallel channel (maroon lines) drawn here before finally calling an end to Primary wave 2. I have drawn this channel very conservatively in this instance: a trend line from the beginning of W black to the end of the second X black, with a parallel copy placed on the high of W black.

Within primary wave 2 the ratios of black W, Y and Z are: W is 187 points less than Y and Z is 137 points less than 0.618 the length of W.

Within wave W black ratios are: A blue is 119 points over 0.618 the length of C blue and B is a 31% correction of A.

Within wave Y black ratios are: wave A blue is 118 points more than 0.786 the length of C and wave B is a 24% correction of A.

Within wave Z black ratios are: A blue is just 14 points less than 0.618 the length of wave C and B blue is a 48% correction of A. These seem to be very good Elliott wave ratios for wave Z black giving a little more confidence that it may be over here.

The 2 hourly chart above shows a closer breakdown of wave Z black to end primary wave 2.

Within wave C blue ratios are: I can find no discernible fibonacci ratios between pink waves 1, 3 and 5. Wave 1 pink is 421 points, wave 3 is 479 points and wave 5 is 406 points. Waves 1 and 5 are close to equality but wave 3 although the longest seems to have no fibonacci relationship to either 1 or 5.

To end wave C blue we may have had an expanding ending diagonal. Waves 1 and 3 green are exactly equal where we could expect wave 3 to be longer, but it’s not shorter. Wave 4 is greater than 2 and wave 5 is greater than 3. Each wave can be seen broken down into a three, although with wave 4 it could also be viewed as a five. Wave 5 green is an exaggerated three wave move.

The drop from the high of 11,254 could very well be the beginning of the long awaited Primary wave 3. Or not. I would use a channeling technique (see daily chart) to provide final confirmation of this wave being underway. Today that required point is about 10,750.

This article comes to you from forexinfo.us. We use the Elliott Wave Principle to predict market trends and movement.

USD Index Elliott Wave Analysis – 28th April, 2010

Elliott Wave chart analysis for the USD Index for 28th April, 2010. Please click on the charts below to enlarge.

The dollar has continued it’s rise exactly as expected from yesterdays analysis. We may have seen an end to wave B blue here at 82.68. If this wave count is correct the next move for the dollar should be down.

If wave B blue has ended here it is a 121% the length of wave A blue. Downside targets for wave C blue may lie in a zone about 79.51 to 79.15.

A conservative approach to calling the top is to use a trend channel as drawn here (blue lines) for wave B blue. When this channel is breached to the downside with a full day bar opening and closing below the trend channel this may provide some confirmation that wave B blue is over and the trend is for the downside for wave C blue.

This wave count is invalidated with movement above 84.59 and below 74.18 at the daily level.

With strong divergence between price and MACD for the last two dollar highs we may see this as an indication of an expiring trend to the upside.

Ratios within wave C pink to end wave B blue are: green wave 3 is just 0.04 less than 0.618 the length of wave 1 green and green wave 5 is 0.19 less than 0.618 the length of green wave 3.

If the dollar continues a little higher I would expect it to reach up to 82.84. Until the trend channel drawn on the daily chart is breached to the downside we must allow further upside movement is possible.

The most likely direction for the dollar today is however down.

This wave count is invalidated at the hourly chart level with movement above 82.68. Any movement above this point would see a slight further continuation of wave 5 for wave C pink.

This article comes to you from forexinfo.us. We use the Elliott Wave Principle to predict market trends and movement.

USD Index Elliott Wave Analysis – 27th April, 2010

Elliott Wave chart analysis for the USD Index for 27th April, 2010. Please click on the charts below to enlarge.

Wave B blue of our correction labeled 2 black has extended further than expected. I did expect a bounce upwards yesterday but I did not expect price to reach to a new high.

This correction seems to be unfolding as a common expanded flat correction. The maximum allowable length for wave B within an expanded flat is twice the length of wave A, so we have an upside invalidation point for the dollar at 84.59. As the dollar rises this wave count expects no movement above that point.

Upside targets for the end to wave B blue can now be calculated at 83.02.

It seemed reasonable to expect wave C pink had ended with a clean five wave impulse at the high labeled 1 green today. However that was not the case. The dollar continues to rise and now it looks like we are seeing a very long expanded wave C pink which is not over yet.

Within wave 3 green so far waves 1 and 3 orange have a very nice fibonacci relationship; wave 3 is just 0.02 less than 1.382 the length of wave 1.

Targets for the upside to wave 3 green may lie about 83.15. Thereafter a bounce down for wave 4 green should be expected that should not go below 82.04, the invalidation point today for the hourly chart.

We may use the purple trend lines as a possible indication of where the upcoming bounce for a wave 4 green may end. This trend channel is drawn first with a trend line from the beginning of wave 1 green to the end of wave 2 green and a parallel copy is placed on the end of wave 1 green. Price should move up beyond the channel as wave 3 green ends, then when wave 4 turns back down the upper purple line could provide resistance for downwards movement.

This article comes to you from forexinfo.us. We use the Elliott Wave Principle to predict market trends and movement.

 

USD Index Elliott Wave Analysis – 26th April, 2010

Elliott Wave chart analysis for the USD Index for 26th April, 2010. Please click on the charts below to enlarge.

The dollar continues to behave exactly as expected for this wave count.

We should see further downwards movement overall this week from the dollar as it moves down for wave B blue within wave 2 black. As this is a regular flat correction we may expect wave C blue to reach equality with wave A blue to take the dollar down to the target of 79.89.

The parallel channel drawn here for the correction for wave 2 black may provide guidance for when wave C blue ends. We may expect it to come to lie about the lower black trend line.

This wave count is invalidated with movement below 74.18.

As expected wave C blue is moving on down in a (most likely) five wave impulse. We may be due for a bounce today for the dollar for a second wave which could correct right up to 82.05, but not above. Thereafter the dollar should turn down again for a strong third wave.

This wave count is invalidated with movement above 82.05.

This article comes to you from forexinfo.us. We use the Elliott Wave Principle to predict market trends and movement.

USD Index Elliott Wave Analysis – 25th April, 2010

Elliott Wave chart analysis for the USD Index for 25th April, 2010. Please click on the charts below to enlarge.

The dollar continues to behave exactly as expected for this wave count.

We may have seen the end to wave B blue at 82.05, right in the target zone predicted which was 82.01 to 82.15.

Wave 2 black is unfolding as a regular flat correction. If the high for wave B blue holds here then we may use a channeling technique to predict the end of wave C blue of the flat correction. A trend line drawn from the beginning of A blue to the high of B blue, and a parallel copy placed on the low of A blue provides a nice parallel trend channel. Regular flat corrections tend to conform well to parallel channels especially at minor degree.

Our predicted end to wave C blue lies about 79.89. This may end wave 2 black in it’s entirety. Although this seems a very shallow correction for a second wave so we may be seeing a combination correction with a regular flat as the first three in a double three.

This wave count is invalidated with movement below 74.18.

The dollar continued moving upwards exactly as predicted by this wave count. The target given was hit very nicely. Thereafter the dollar turned to move strongly back down.

Some divergence can be seen with price and MACD for the end to wave C pink giving a little more confidence that upside movement has ended for the time being. A parallel channel (pink lines) drawn for the five wave impulse structure labeled wave C pink has been clearly breached which provides further confidence that upside momentum has ended. This channel is drawn using Elliott’s channeling technique: a trend line drawn from the high of 1 to 3 green and a parallel copy placed on the low of 4 green.

We should see a five wave down impulse structure now for wave C blue.

This article comes to you from forexinfo.us. We use the Elliott Wave Principle to predict market trends and movement.

USD Index Elliott Wave Analysis – 21st April, 2010

Elliott Wave chart analysis for the USD Index for 21st April, 2010. Please click on the charts below to enlarge.

The dollar continues to move within a narrow band for the last few days, overall the trend is up exactly as expected for this wave count.

Wave B blue must reach up to 82.01 to satisfy the rule of a 90% retracement for wave B within a flat correction.

This wave count is invalidated at the daily level by movement below 74.18.

We may be seeing a triangle or a flat correction for wave 4 green within wave C pink. This is somewhat confirmed by MACD hovering close to zero.

The next move If wave 4 was over at 80.77 we may have an upside target of 82.01 to 82.15 to end wave B blue.

This wave count is invalidated at the hourly level with movement below 80.72.

This article comes to you from forexinfo.us. We use the Elliott Wave Principle to predict market trends and movement.

DJIA Elliott Wave Analysis – 19th April, 2010

With the DJIA about to possibly move into a primary third wave down and economic news beginning to look slightly more dire, here’s my two cents worth. I did these wave counts only with the knowledge of the bigger picture, that the DJIA was in a primary wave 2 correction up of a cycle degree C wave down. EWI have been expecting the end to this primary wave 2 for some time now and I wanted to have a look for myself to see if I could add further confusion to the mix

So for what it’s worth, here it is:

Elliott Wave chart analysis for the DJIA for 19th April, 2010. Please click on the charts below to enlarge.

The first thing that strikes me about this chart is we have still yet to reach the 0.618 fibonacci ratio for primary (maroon) wave 1 at about 11,245. This would seem to be a reasonable expectation of a target to the upside for primary wave 2.

The next thing that strikes me is that wave Z (black) seems a little short. It is 237 points short of 0.618 the length of wave W black, and 353 points short of 0.618 the length of wave Z black. It would seem reasonable for wave Z to have some type of fibonacci relationship with either of it’s counterparts.

The last thing that strikes me is that no matter how you draw a channel for the entire movement of primary wave 2 we do not have a break yet to the downside of the parallel trend channel. It would seem reasonable to wait for this channel to be broken on the downside before calling confirmation of an end to primary wave 2. That would be a very conservative approach.

Within wave W black we have a very nice contracting leading diagonal for wave 1 pink of C blue.

I can find no reasonable Elliott wave ratio between waves A and C blue within wave W black. Within wave C blue here again I can find no reasonable (within less than 100 points) Elliott wave ratios.

Within the first wave X black wave C is 48 points greater than 0.618 the length of wave A blue.

Within wave Y black waves A and C blue do not appear to have a reasonable fibonacci relationship. Wave A is 117 points more than 0.786 the length of wave C.

Wave C blue again begins with a leading diagonal, this one expanding. A nice example of alternation perhaps.

Within wave C blue wave 5 is just 10 points short of 0.618 the length of wave 1. This is the first and best fibonacci relationship I found with this wave count.

Within the second wave X black wave B blue is a perfect 38% correction of wave A blue, and wave C is just 11 points short of 0.618 the length of wave A blue.

Taking a close look at wave Z black this wave count sees upwards movement as not quite over yet.

Within wave C blue it may be reasonable (or not?) to expect wave 5 pink to have some kind of fibonacci relationship with either wave 1 or wave 3 pink. If wave 5 is to equal wave 1 in length we may see the DJIA rise to 11,243. This is very close to the 0.618 fibonacci ratio for primary wave 1.

Therefore one more five wave impulse up to end about 11,243 to 11,245 may be required before primary wave 2 is finally over.

This article comes to you from forexinfo.us. We use the Elliott Wave Principle to predict market trends and movement.

USD Index Elliott Wave Analysis – 19th April, 2010

Elliott Wave chart analysis for the USD Index for 19th April, 2010. Please click on the charts below to enlarge.

As expected the dollar moved up for a third wave and bounced back down close to the lower trend channel as drawn here for a fourth wave.

A short term target for the upper end to wave C pink of wave B blue lies about 82.01 to 82.28.

Wave B blue does not have to end here, it could continue further past 82.22. If this occurs any scenario including a large running triangle would be eliminated.

This wave count is invalidated at the daily level with movement below 74.18.

The target given for the upper end to wave 3 green within wave C pink was 81.47. Upwards movement has fallen short of this target by 0.22 to end wave 3 at 81.25.

A target for the next piece of movement up for wave 5 green of wave C pink is calculated as a minimum requirement at 82.01 for wave B blue to reach a 90% correction of wave A blue (a rule for flat corrections). If wave 5 green reaches 1.618 the length of wave 3 green (is extended) we may see wave C reach up to 82.28.

When wave B blue is over the dollar should turn back down.

This wave count is invalidated with movement below 80.72.

This article comes to you from forexinfo.us. We use the Elliott Wave Principle to predict market trends and movement.