Elliott Wave Methodology a step by step approach
The stock market is an animal of its own a living entity and it has life because it is reflection of life. Now, can we say that about anything that interacts with life is life? For instance you go ride a bicycle have fun with it for a sec and call it a life? I don’t think so, however if you had ridden this favorite bike of yours for thousands of hours and when it becomes normal to think that that bike is just an extension of your arm, then you have done some thing with it that you feel like it has life. Before i go on a tangent and completely loose my train of thought let me get straight to the point! Elliot wave when applied in the stock market it becomes a life form.
Lets dive straight into what my methodology that has worked for me so far. The indicators required are :
a) ZigZag percent indicator from Think Or Swim platform.
b) Regular RSI indicator the setting are left as default
First order of business is to pick stock based on the following criteria:
Step 1) Volume
Pick a size that can generate enough volume, because from what I can tell it is easier and more compelling to identify the waves when the volume is thick , when it is thin the waves don’t show up very well. Since we are talking about waves, let me give you an simple example of the waves in s lake vs the size of the waves in the ocean, same principle the more the market participants the more the visibility of the waves.
Step 2) RSI 40/60 levels
The RSI 20 and RSI 80 are the usual oversold and overbought conditions that every one follows, but i think the 40 and 60 are the real levels that act as inflection points for breakouts and breakdown’s. Ideally it is best to look for setups where a Zigzag or triangle is about to happen then pick a time when the stock is going to intersect at these crucial levels. Ideally when the wave pattern like the zig zag ABC (seen in the diagram) gets to triggered at level 40 when the stock makes the A to B move, along with the implied volatility high very much above normal.
The BC move is ideal when the stock tries to breakout of the 60 RSI level and fails, then is when a nice drop happens.
Set it up to a 8% level first on the weekly chart
Step a) Once the larger trend is identified, reduce the % setting in the Zigzag indicator to get an idea as low as 1% to get the patterns identified.
Step b) To tell if it is a zz wave pattern, look for a 5 move up kind of pattern. If it is a straight up or down then it is triangle.