Strategy Name: 161 Rejection
Type of strategy: A reversal strategy.
Conditions for use: This strategy is used if there are valid Elliot wave trend legs. It is used to attempt to trade the reversal of wave 5 into the ABC correction.
Drawing the fib swing:
In Elliot wave, there should be a consistent trend and then this starting to get a bit more messy. The messy stuff will usually have a false reversal. A range and breakout of the range making it look like the trend has ended. From this there will come another big trend leg (Wave 5).
We are able to draw our swing when we have seen:
A steady trend with few dips. Starting to pick up pace.
The trend getting choppy and probably false reversals.
A new high/low being made in the trend.
Once we have these, we can fib the range and the 161 - 220 of this is our intended zone of entry for reversals. Also where we want to be protective of any profits we have from trading the trend. Even if not betting on reversal, it’s wise to trail stops tight into these levels. 161s can create reversals.
When a strong wave 3 has transitioned into a range and a pullback in the trend, this is when we can draw fibs on the pullback and look for this trade.
Basic strategy theory:
In the guidelines for Elliot wave 161 extensions are mentioned as a common ending point. And if you go through lots of examples of reversals you’ll probably come to see that has a point. Strategy is based loosely on that Elliot wave guideline. That it should be obvious seeing the hyper strong wave 5 into 161 extensions if you draw them.
To make a guideline into a practical strategy we need to work out entry and exit criteria. In testing I’ve found the reversal usually will come from the 161 or close to the 220. Sometimes just kissing the 220 fib. In most instances price is able to break the 220 the planned trade will fail. That’s why the stop is there.
Things we usually see before the strategy trades:
An early spot to notice this setting up is late into wave 3. Late into wave 3 the trend in question will be getting a lot of attention. You should look for strong trends that seem to be getting stronger and if it’s a big move there should be a lot of public chatter about it and forecasts getting increasingly more optimistic.
This obviously strong trend should transition into a messy range and/or sharp pullback. Then there should be the fastest move of the trend so far when this pullback reverses. Confidence in the trend should be ultra high and price should be consistently trending up to the 161.
Thing we usually see when strategy is not working (Stop loss conditions):
This is a great strategy when it works but it fails when used in the wrong part of a move in a big way. The rules for this strategy are price reverses at or before 220 fib. When it fails we either break the 220 and head into a strong trend or we go a bit over, make pullback smaller than we were targeting and the 220 make big break next time.
It’s best to stop out over the 220 in case a big trend move comes. Unfortunately, it’s also the case that a lot of time price will go just over the 220 and then pullback. It won’t be the target swing the trade was taking, but it would have put the trade in profit. Which means you can stop out at the worst time.
After a 220 break the probability of a bigger pullback decrease. It’s usually better to switch to following the trend and enter into any big pullbacks retesting previous support/resistance levels. Which is worth noting, it’s tempting to enter again if stopped out and it looks like it’s working. Often a trap.
Strategy strengths: Can be very high risk:reward. Helps a lot with protecting profits in a running trend trade. When this is working once the swings targeted start they are often strong and smooth and easy to take close to the full value of the move. Trailing stops do not hit and big profit targets can.
Strategy weaknesses: When used in a move that is not forming a wave 5 (For example using it through wave 3) this strategy generates false signals that price will usually trend against. Losses not cut can be devastating. Entries can sometimes be spiked out at the end of a move just over the 220 fib.
Type of strategy: A reversal strategy.
Conditions for use: This strategy is used if there are valid Elliot wave trend legs. It is used to attempt to trade the reversal of wave 5 into the ABC correction.
Drawing the fib swing:
In Elliot wave, there should be a consistent trend and then this starting to get a bit more messy. The messy stuff will usually have a false reversal. A range and breakout of the range making it look like the trend has ended. From this there will come another big trend leg (Wave 5).
We are able to draw our swing when we have seen:
A steady trend with few dips. Starting to pick up pace.
The trend getting choppy and probably false reversals.
A new high/low being made in the trend.
Once we have these, we can fib the range and the 161 - 220 of this is our intended zone of entry for reversals. Also where we want to be protective of any profits we have from trading the trend. Even if not betting on reversal, it’s wise to trail stops tight into these levels. 161s can create reversals.
When a strong wave 3 has transitioned into a range and a pullback in the trend, this is when we can draw fibs on the pullback and look for this trade.
Basic strategy theory:
In the guidelines for Elliot wave 161 extensions are mentioned as a common ending point. And if you go through lots of examples of reversals you’ll probably come to see that has a point. Strategy is based loosely on that Elliot wave guideline. That it should be obvious seeing the hyper strong wave 5 into 161 extensions if you draw them.
To make a guideline into a practical strategy we need to work out entry and exit criteria. In testing I’ve found the reversal usually will come from the 161 or close to the 220. Sometimes just kissing the 220 fib. In most instances price is able to break the 220 the planned trade will fail. That’s why the stop is there.
Things we usually see before the strategy trades:
An early spot to notice this setting up is late into wave 3. Late into wave 3 the trend in question will be getting a lot of attention. You should look for strong trends that seem to be getting stronger and if it’s a big move there should be a lot of public chatter about it and forecasts getting increasingly more optimistic.
This obviously strong trend should transition into a messy range and/or sharp pullback. Then there should be the fastest move of the trend so far when this pullback reverses. Confidence in the trend should be ultra high and price should be consistently trending up to the 161.
Thing we usually see when strategy is not working (Stop loss conditions):
This is a great strategy when it works but it fails when used in the wrong part of a move in a big way. The rules for this strategy are price reverses at or before 220 fib. When it fails we either break the 220 and head into a strong trend or we go a bit over, make pullback smaller than we were targeting and the 220 make big break next time.
It’s best to stop out over the 220 in case a big trend move comes. Unfortunately, it’s also the case that a lot of time price will go just over the 220 and then pullback. It won’t be the target swing the trade was taking, but it would have put the trade in profit. Which means you can stop out at the worst time.
After a 220 break the probability of a bigger pullback decrease. It’s usually better to switch to following the trend and enter into any big pullbacks retesting previous support/resistance levels. Which is worth noting, it’s tempting to enter again if stopped out and it looks like it’s working. Often a trap.
Strategy strengths: Can be very high risk:reward. Helps a lot with protecting profits in a running trend trade. When this is working once the swings targeted start they are often strong and smooth and easy to take close to the full value of the move. Trailing stops do not hit and big profit targets can.
Strategy weaknesses: When used in a move that is not forming a wave 5 (For example using it through wave 3) this strategy generates false signals that price will usually trend against. Losses not cut can be devastating. Entries can sometimes be spiked out at the end of a move just over the 220 fib.