Wave 3 Momentum Strategy
Trend Following
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Strategy Name:
- Wave 3 Momentum Strategy
Strategy Type:
- Trend Following
Strategy Premise Overview
:
- The Wave 3 Momentum Strategy capitalizes on the strong and extended price movements typically seen in the third wave of Elliott Wave Theory. This wave is often the longest and most powerful, providing substantial opportunities for trend-following trades.
Conditions for Use:
- Specifically applied in markets where Elliott Wave patterns can be clearly identified, particularly the development of a strong wave 3.
- Look for confirmation of wave 3 formation after waves 1 and 2 have been completed and strong trending action.
Planning Entries:
- Upon the breakout of wave 1 the trend is going to head into a state where you really can’t do much wrong if you have any sensible way of following the trend. On the break of the high of wave 1 draw a fib extension from the end to the start of wave 1. Up to the 2.20 extension fib strong momentum strategies can work exceptionally well.
- Wave 3 is consistent and persistent. Small charts can be used to enter into corrective patterns (Link) and breakout patterns (Link).
Planning Stops:
-Elliot wave 3 should be easy. If it’s not easy, it’s not wave 3. During wave 3 we should be seeing consistent momentum with lower lows and lower highs for a downtrend and higher highs and higher lows for a downtrend. We can keep adjusting our stops to bet on this high lows/lower highs structure.
-Breaks of price structure are bad. Small contained pullbacks are fine but it’s important to be aware of what the bet is when betting we’re in wave 3. We’re betting there’s a lot of momentum, devising a plan to attack that aggressively but also to quickly get out if that momentum does not materialize.
-In the below picture the smoothed Elliot wave has been broken down into the type of small chart action we typically see.
- Note that from the breaking of wave 1 to the start of wave 4 there are consistent higher highs in the uptrend or higher lows in the downtrend. This is the tendency we’re betting on when betting on wave 3. As such, our stop losses go under lows or above highs to bet on this continuation pattern.
Planning Targets:
-Using basic trailing stops with structure if the thesis of wave 3 is correct you should be able to ride most of the move. Getting kicked out the trade in the false reversal before the final spike.
- The passive target here is the 2.20 fib of wave 1, with the option to trail stops more and more aggressively as we get close to there if actively managing the trade.
Typical Win Path:
- Wave 3 will be a strong grinding move. Up a bit, some sort of correction and then a new breakout. Up a bit more, another correction, retest and then the next breakout.
-The move will strengthen as it develops.
- The move should start to transition from nice and steady to extremely strong. During this section of the move there’s no point trying to time highs/lows but you should be more proactive in trailing stops if actively managing the position. As the move gets more sensational it can become less sustainable.
- Higher highs and higher lows. Or lower lows and lower highs. This is the real defining trait of Elliot wave 3. Just nice textbook trending action.
Typical Lose Path:
- There are many ways in which attempts to trade wave 3 can fail. From trend reversal to miscounted waves.
- In any event, if and when the level we had marked as the end of wave 2 is broken, wave 3 has failed to form. We should entirely reassess our analysis and biases.
- If it’s not easy, it’s probably not wave 3. This is really the key thing to remember.
Why Strategy is Expected to be Successful:
- Wave 3 is often the most powerful and extended wave in Elliott Wave Theory, providing substantial trend-following opportunities.
- The strategy leverages the strong momentum and clear direction of wave 3, allowing for favorable risk-reward ratios.
- Provides clear entry and exit points based on Elliott Wave patterns and Fibonacci extensions, facilitating precise trade management.
-Being right about being in wave 3 gives the chance to really make a lot of money. Aggressively attack a trend and also know when it’s time to bank profits.
-It’s easy to define the failure levels of the setup based on the basic Elliot rules. They’re very non-subjective when it comes to areas wave 3 should not break.
-When “Wave 3 hunting” you can be wrong for very small amounts of time but if and when you get one right, you’re right big and you’re right consistently for a long time. More than covering any build up of losses from multiple small stop outs.
Known Risks and Weaknesses:
- The strategy is vulnerable to misidentifying wave counts, leading to incorrect trade placements.
- Requires a good understanding of Elliott Wave Theory and accurate pattern recognition.
- May produce losses if wave 3 does not exhibit the expected strength and momentum.
Trade Plan Execution:
Bullish Execution Plan:
Step 1: Market Analysis
Identify a developing uptrend and look for “C” points. The points where there was an obvious break of structure.
When we have a C point we then look for a move in the direction of the trend, a pullback and a new breakout. This represents waves 1 and 2 completing. When we’re breaking the high of wave 1, we may be entering wave 3.
Step 2: Identify Entry Points
During wave 3 we can trade all types of trend patterns.
Set alerts for break outs and apply simple breakout rules.
Set alerts for retest of breaks and apply simple retest rules.
Look for two leg corrections forming in “M” shapes and apply harmonic rules.
Step 3: Draw Fibonacci Extensions on Pullbacks
Keep drawing fibs on pullbacks. You can use these level to give future momentum signals, trail stops and plan future resistance levels.
Use the following trend continuation strategies on small charts. (Link).
Step 4: Follow Momentum
If you mindlessly follow momentum in wave 3 you’ll invariably lose a few trades as we transition into wave 4, but if you’ve been doing this since early in the wave 3 breakout you’ll make much more than you lose.
Plan resistance levels to be cautious at, but do not pick highs. When in wave 3 most of the time it does not pay to be clever. It pays to follow momentum.
Use trend following strategies with good exit rules. This will be highly profitable while wave 3 continues and it’ll cost you about three losing trades when it reverses.
Trading at an average of 1:2 RR you should win at least three trades before hitting a three trade losing streak. This would be a 50/50 win rate but you’d make 3* risk profit.
Bearish Execution Plan:
Step 1: Market Analysis
Identify a developing downtrend and look for “C” points. These are points where there was an obvious break of structure.
When we have a C point, we then look for a move in the direction of the trend, a pullback, and a new breakout. This represents waves 1 and 2 completing. When we’re breaking the low of wave 1, we may be entering wave 3.
Step 2: Identify Entry Points
During wave 3, we can trade all types of trend patterns.
Set alerts for breakouts and apply simple breakout rules.
Set alerts for retests of breaks and apply simple retest rules.
Look for two-leg corrections forming in “W” shapes and apply harmonic rules.
Step 3: Draw Fibonacci Extensions on Pullbacks
Keep drawing fibs on pullbacks. Use these levels to give future momentum signals, trail stops, and plan future support levels.
Use the following trend continuation strategies on small charts.
Step 4: Follow Momentum
If you mindlessly follow momentum in wave 3, you’ll invariably lose a few trades as we transition into wave 4. However, if you’ve been doing this since early in the wave 3 breakout, you’ll make much more than you lose.
Plan support levels to be cautious at, but do not pick lows. When in wave 3, most of the time, it does not pay to be clever. It pays to follow momentum.
Use trend-following strategies with good exit rules. This will be highly profitable while wave 3 continues and it’ll cost you about three losing trades when it reverses.
Trading at an average of 1:2 RR, you should win at least three trades before hitting a three-trade losing streak. This would be a 50/50 win rate, but you’d make 3* risk profit.
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