Once we’ve got the first five waves we have the general setup of the . After the last wave has broken above the ascending channel it’s the time to get ready for some action.
Step #1: Prior to the Formation look to have a clear .
Firstly, before the first wave to develop we need to have a clear trend that needs to be reversed. For high probability trades, we want to see a prior bullrish trend before the develops.
This step is quite essential if you want to correctly trade the pattern.
Now that we’ve identified a trend, it's time to apply the rules to the price chart. This brings us to the next step of our reversal strategy.
Step #2: Try finding a 5 wave move that can be contained in a channel. The last wave 5 must break above the channel.
A valid is composed of 5 waves that follow some simple rules. However, the most important rules are that wave 2 and 4 must be contained within the channel created by Wave 1 and Wave 2.
Secondly, wave 5 breaks above the created by wave 1 and wave 3.
Step #3: Sell after we break above and then a candle close back inside the .
At the moment when the price enters and closes back into the , we want to enter a short position. We like to wait for the close inside in order to eliminate possible fake breakouts.
Note*: If we don’t get a close back into the we don’t have a valid trade signal.
Another sign to look for is how quickly it goes back into the channel. We prefer to only trade the patterns that retrace very quickly back into the range.
This is a sign that a smart money reversal is at work.
Remember, in trading, you only want to trade the high probability trade setups.
Step #4: Draw a that connects the wave 1 high and wave 4 low and extend it in the future. Take profit when the EPA line is hit or candle close below it..
The line that connects the wave 1 high and wave 4 low is called the EPA line.
The EPA line stands for Estimated Price at Arrival and it’s an effective take profit strategy. The EPA line main purpose is to show at what price the market will extend after it reversed the previous trend.
Note*: If the EPA line is too steep, often time it means that the price will never reach it. In this case, you want to take profits early.
Step #5: Hide Protective Stop Loss above Wave 5.
The protective stop loss can be located above the last wave or wave 5. This strategy gives us a very tight stop loss which is good for our risk management strategy.
Obviously that a break above wave 5 means we also break first above the channel and this will invalidate the validity of the chart pattern.
Note** the above was an example of a SELL trade using the best strategy. Use the same rules for a BUY trade.
Conclusion - Best Strategy
The strategy is a trading strategy built around waves the same like trading. We use other trading concepts like channeling and price symmetry to find the best possible trade signals.
If the trade works in our favor then we have a really good chance to have a good trade in terms of risk to reward ratio. With trading experience, it will become much easier to spot the patterns.