Frequently Asked Questions

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Frequently Asked Questions (FAQ)

 


What is a Five-Wave-Pattern?
In markets, progress ultimately takes the form of five waves of a specific structure. Waves (1),(3) and (5) in Figure 1-1 actually affect the directional movement. 

 

What is a Countertrend?
Waves (2) and (4) are countertrend interruptions. All countertrend interruptions employ corrective mode. 

 

What Are The Rules of the Elliott Wave Principle?
Elliott noted three consistent aspects of the five-wave-form. They are: Wave two never moves beyond the start of wave one.
Wave three is never the shortest wave, and wave four never enters the price territory of wave one.

 

What is a Motive Wave?
A motive wave (also called a "five") has a five-wave structure. Its subwaves are denoted by numbers (in this case 1,2,3,4 and 5.)
Their structures are called "motive" because they powerfully impel the market.

 

What is a Three?
A corrective wave (also called a "three" has a three-wave structure or a variation thereof. Its subwaves are denoted by letters (in this case, a-b-c). 

 

What is a Zigzag?
A zigzag in a bull market is a simple three-wave declining pattern labeled a-b-c. It subdivides into a 5-3-5 affair with the top of wave b noticeable lower than the start of wave a. In a bear market, an a-b-c zigzag correction will take place in the opposite direction.

 

What is a Flat?
A flat correction differs from a zigzag in that the subwave sequence is a 3-3-5 affair.In a regular flat correction wave b terminates about at the level of the beginning of wave a , and wave c terminates slightly bit past the end of wave a.

 

What is an Expanded Flat?
Flats can be what we call "expanded", and contain a price extreme beyond that of the preceding impulse wave. Elliott called this variation an "irregular" flat, although the word is inappropriate as they are actually more common than "regular" flats. 

 

What is a Triangle?
Triangles are overlapping five wave affairs which in turn subdivide 3-3-3-3-3. They appear to reflect a balance of forces which results 
in a sideways movement.

 

What is a "Double Three"?
A single "three" is any zigzag or flat. A double three or triple three is a less common type of corrective pattern which is essentially a combination of simpler types of corrections, including zigzags, flats and triangles.

 

What is a Diagonal Triangle? 
A diagonal triangle is a special type of wave which occurs primarily in the fifth wave position at times when the preceding move has gone "too far too fast", as Elliott put it. A very small percentage of diagonal triangles occur in the C-wave position.

 

What Does Alternation Mean?
The guideline of alternation touches almost every aspect of the Wave Principle and is a useful one to keep in mind when analyzing wave formations and 
assessing future possibilities. The guideline tells us to expect alternating patterns in virtually all wave movements.

 

What Time Frames Do You Look At? 
Our initial analysis is always done off the daily and weekly time frames. During the trading day, we use 5,10, 30 and 60 minute charts. For the SP futures, 1 and 5 minute charts are also helpful. 

 

What is a Divergence?
A divergence occurs when a momentum indicator or other instrument fails to confirm a move in the price action of the market under observation. For instance, if the SP futures makes a new low in price, but the ROC fails to make a new momentum low, then the SP is said to be diverging from the oscillator. Likewise, if the SP futures make a new low that is not confirmed by new lows in a related market or index (for example the SP versus the Dow Industrials, or the SP versus the TICK), this is also considered a form of divergence. Divergences are useful in that they warn of a loss of momentum and often precede a reversal in price. 

 

What is the ROC?
The 10 period Rate-of-Change is today's close minus the close ten days ago. For example, to get Friday's 10-period ROC, you would subtract Wednesday's close from Friday's close. Raw momentum is the only derivative of price that we have found to offer statistically significant results in our quantitative research. Our results with this 
indicator have proven to be durable and robust across all markets. 

 

What is a Pivot?
A market reference point. Our most frequently used pivots are swing highs and swing lows such as the high and low of a daily bar or the highs and lows of the hourly cycles. 

 

What size stops do you use? 
In general, we use an initial stop of 2 points in the SP futures unless specified otherwise. In the domestic futures markets, we use a fixed $500 stop per contract unless specified otherwise. Stops should be tightened up as a market moves off in your favor. That kind of stop is called a "trailing" stop.

 

How do you enter positions? 
At the time we got the pattern, at the market.  Each trader must ultimately find their OWN style that works best for them over time.  

 

What are the main indicators you use on your charts? 
We use the same indicators on all markets, all time frames. We use a 10-period moving average, a price oscillator, and a 14-period RSI.  Keep in mind that indicators are just a crutch to tell you what is already there on bar charts. Many traders do best when they learn to read bar charts without the use of indicators, oscillators, etc. 

 

What is the "Breakout Mode"? 
We use a "breakout" mode strategy when the market has had some form of range contraction. A trend day, or large range expansion day, often follows periods of range contraction, or small average daily ranges. When we are in breakout mode, we use strategies to enter in the direction the market is moving, instead of waiting for a reaction in the price. 

What is a Bull/Bear Flag?
These patterns are taken directly from classical charting (Schabacker, Edwards & Magee, etc.) and have withstood the test of time. Flags are a continuation pattern in a trending market. They are found on all time frames, all markets, and offer one of the better risk reward ratios for trade setups. A flag formation should be preceded by a "pole" or initial momentum move in the direction of the trend. The ensuing consolidation tends to be relatively shallow. Continuation patterns are much shorter than reversal patterns. The longer a "flag" goes sideways, the greater the odds that it will turn into a reversal pattern as opposed to leading to a new leg in the direction of the trend. 


What is the Short Skirt Trade? 
A SHORT SKIRT is a quick scalp trade made in the direction of the short-term trend. The setup occurs after the S&P has made a sharp "impulse" move. The pattern tends to look like a continuation flag on a 1-minute chart. We call it a "Short Skirt" because the trade 
usually lasts between 3 - 10 minutes. The concept is - "quick in and quick out without getting caught." 

We try to look for Short Skirt setups that have the potential for a minimum of three points in the trade. This is to allow for a minimum of ? point slippage in and ? point slippage out. A 2-point STOP is placed from the trade entry price. The objective for the trade is a retest of the previous swing high or low, even though the market often makes a new leg up or down. 

 

How do you measure market breadth, put call ratio, and volume? 
Market breadth is monitored by looking at the number of advancing issues minus the number of declining issues on the NYSE. Put/Call data is provided by the individual exchanges. We look at the equity only put call ratios, in addition to the index put call volume ratios. 

 

Please define TICK, TIKI, TRIN, and VIX 

TICK: This is the net change of all NYSE stocks on an uptick minus all NYSE stocks on a downtick. 
Plus or minus 1000 tends to be an extreme reading.

TIKI: This is the difference between all DOW stocks on an uptick minus all DOW stocks on a downtick. Plus 24 or minus 24 tend to be extreme readings. 

TRIN: The TRIN is also known as the ARMS Index after its creator, Richard Arms. It is computed as follows: (Advancing Issues/Declining Issues) / (Up Volume/Down Volume). We watch the direction TRIN is moving to indicate the overall trend of the market. For example, if the TRIN goes from .80 to 1.00, this would indicate selling is coming into the market. 

VIX: This is the Volatility Index that is based on the implied volatility of the at the money OEX puts and calls .

 

What is a "Pivot Point"? 
This can be a previous swing high or low, or visible chart point such as the high or low of a gap area. Globex highs and lows, along with the previous day's high and low are all forms of "Pivot Points." We do not use Fibonacci numbers or arbitrary calculations. We are interested in levels that ALL market participants are aware of, as would be the case with a key high or low.

 

What are the Red, Yellow and Blue Lines On the Bar Chart That You Post?
Dr.Andrew's Mid-Line technique. This color rule is based off an average true range function added or subtracted from the previous swing high or low. 

 

How do you watch so many markets? 
The majority of the time, we watch a quote board which gives us last price instead of watching charts on each individual market.  If we want to look at the charts on a particular market, we pull up a screen that has the 10, 30, and 60-minute time frames. The SP's and the Dow  are usually the only markets where we will look at charts on a shorter time frame. 


Can you recommend a broker?
We do not recommend specific brokers. We do not maintain any commercial relationships or share in commissions with any brokers. Your choice of broker is entirely your own. 

 

What size account is appropriate to trade? 
It is up to each individual to assess his or her overall risk profile and to know his or her individual net worth before determining proper account size. Always consult your broker for their requirements as well. Our service is for educational purposes and can provide a valuable learning forum regardless of your account size. However, as a general guideline, it is possible 
to trade the SP e-mini contract with as little as $5,000. We feel that keeping leverage low is the key to good money management. A trading account should only be funded with risk capital, 
and not capital used for living expenses. 


I want to join your service. What do I have to know about the stock market? 
Though prior knowledge and experience is not required, it is important that you understand that trading involves risk. Our online trading service is educational in nature and will be of best value
 to you if you can monitor the markets real time. 

 

I still have another job. Can I trade part time? 
Yes. You decide on the pace of your learning. Ultimately trading is a full time job, and many people new to the business are often surprised by the long hours professional traders devote
 to their study of the markets.

 

How many trades do we make each day?
There is no normal day, and the number of trades varies with the volatility of the stocks and futures contracts that we are trading. However, we find it better to be patient and wait for a few well thought out high probability trade setups, than to settle for marginal trades.  We find that when traders start overtrading, they get sloppy and make mistakes. In our own trading, our win-loss ratio goes up dramatically when we make fewer trades as opposed to more trades. Ultimately, the higher the win loss ratio in your trading, the greater the leverage you will be able to use in your account. 

 

I can't be near a computer all day - do you have any other suggestions for me?
Our Basic Online membership offers set-ups and trading ideas that can be implemented without the need for watching the screen during the day. 

 


How long does it take to learn to trade successfully? 
In our experience, the average length of time it takes for a person to be able to trade with the consistency and confidence necessary to make a decent living is about three years. Some people are never able to do this, as they are unable to master the mental side of the game. A few people have been able to find their niche quickly and show consistent profitability after just 6 months. This is the exception though. 

 

What does a highlighted alert like "ALERT"  mean? 
This means that we are posting a highly-likely important TOP at hand. 

 

What is a Bear Trap?
 A bear trap occurs when the market breaks below chart support, bringing traders in on the short side, then quickly reverses, trapping traders with losses. 

 

What is a Breakout Trade?
A trade that occurs when the market breaks above or below some pre-define range, usually a nearby support or resistance levels such as the previous day's high 
or low, or the last 60 minutes high/low. 

 

What is a "Edge"?
Term used to describe when a trader has the advantage or a favorable margin. It is even better when this margin can be quantified statistically. 

 

What is a Equilibrium Level?
The point at which buyers and sellers are in balance. Coincides with a neutral chart point that is often at the end of a consolidation period.

 

What does "fill or kill" mean?
This means do it now if the stock is available in the crowd or from the specialist, otherwise kill the order altogether.




What does "Opening Bulge" mean?
Period after the opening when the public has a tendency to pay too high a price.

 

What is "Resistance" 
Area where sellers have come in the past.

 

What is a "trigger"?
Level at which a trade will be initiated if a market trades to that price.



What is a Wedge?
A low volatility point in which a triangle type formation can be drawn on the bar charts. 

 

What is a Market Order?
An order to buy or sell a stock immediately at the best available current price. A market order guarantees execution.



What is MIT?
Market-if-touched order. An order which  becomes a  market order if the specified price is reached. 




What is MOC? 
Market-on-close order. A buy or sell order which is to be executed as a market order as close as possible to the end of the day. 


What is a Scalp?
A Short-term trade that capitalizes on the market's smaller fluctuations.




What is a Shakeout Fakeout?
A sharp downward move following an area of distribution that quickly reverses itself and comes back up through the distribution area.

What is Momentum?
The difference between the last price and the price numbers bar. A 2-period Rate of Change (ROC) is the same as a 2-period Momentum.

 

 

 

 

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The Elliott Wave Principle is a detailed description of how markets behave. The description reveals that mass investor psychology swings from  pessimism to optimism and back in a natural sequence, creating specific patterns 
in price movement.Each pattern has implications regarding  the position of the market within its overall progression , past, present and future. The purpose of this publication and its associated services is  to outline the progress 
of markets in terms of the Elliott Wave Principle and to educate interested parties in the successful application of the Elliott Wave Principle. This is probably the most comprehensive trading education on how to project high probability
 time & price targets based on Elliott Wave pattern structure.