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I-K is virtually a repeat of A-H and it should be fairly evident as to what happened. I-K will introduce the next thing I want to write about. Some will hate me for this.

I don't always take that add-on set of contracts that are represented by I-M. Yes, I know that's where I made a good piece of profit right? Right! But that's also where I incurred additional risk. When I entered that second set of contracts at point I, I stood to lose everything I made on A-H. That has to be taken into account. It's a part of risk management.

So how do I know whether to take it or not? Boy, I almost hate to say it, but it has something to do with waves. However, if it turns out that this has anything to do with Elliot waves, believe me it is purely coincidental.

I usually trade an add-on set of contracts, (i.e. a continuation set) at the breakout of the first congestion after the first leg up. But not always. I-K is a continuation set of the second leg up and I'll come back to it soon. Here's what I mean: I trade a breakout of the second congestion

Congestion

However, there are exceptions to this and they are why I said "usually." I have to keep my eye on the clock. I have to make sure this is happening when there is still at least one hour of trading left in the market I want to trade. These are best when they occur early in the trading.

All right! So why might I not take the second breakout on the trade I've been showing? Here's why! I do it only if the second congestion is relatively flat, or coiled. I don't do it if there is a flag. I hate to say how many bucks I lost 'til I figured that one out. I won't tell. Just take my word for it that it was plenty. On the other hand, I should tell "why."

When a flag formation is made it looks like this:

In a down market, it looks the same. Just turn the page upside down and hold it up to a mirror.

The problem is that, because it represents a serious retracement, prices are apt to spend a good part of their momentum just reaching back to the top of the flag pole. There will usually not be enough momentum to carry very far before prices congest again.

Now if prices had made a W formation or an M formation, it would have been a different story. Then prices would have been able to move a lot higher.

I'm saying that I want to see more congestion before I'm willing to put myself at risk once again. I especially like tight congestions. By tight, I mean lots of individual price bars with just about equal highs, lows, opens, and closes.

A close look will show that I took the very next breakout, the one above the flag, for exactly that reason.

Let's talk about add-on sets on a third breakout. The rule is the same, they must come with at least an hour of trading left in the market. The breakouts must come from prior congestion. I never, ever, take a fourth breakout no matter what. Remember that I have to be out by the close. Few are the days when a market will even offer a fourth breakout. By then, it will be too late in the day to risk it. Fourth breakouts usually don't go all that far. Elliot enthusiasts probably have some kind of explanation for all of this. Whoa! Don't tell me, I don't want to know. Looking at that again...

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