MTPredictor and the three standard trade setups

As you have seen over the last few chapters, I believe that the best way to use the Elliott wave theory is to look at each individual pattern in isolation, (the unique MTPredictor isolation approach), and in particular, use the simple ABC correction as a way to identify a high probability, low risk trade set-up. The MTPredictor software program uses this simple pattern in the three specific set-ups that the software can automatically identify for you. These are:

1. The TS1 trade set-up - Minor abc correction within a Wave (2orB) swing.

2. The TS2 trade set-up. - Minor abc correction within a Wave (4) swing.

3. The TS3 trade set-up - The simple ABC correction by itself

In this chapter I would like to introduce these three set-ups and look at them one by one in more detail, starting with the simple ABC correction or TS3 set-up.

What is a simple ABC trade set-up ?

A simple ABC is where the market makes a correction that subdivides into a lesser-degree ABC, where the minor Wave C exceeds the price extreme of the minor Wave A.

This a very important set-up because once the ABC correction is complete, the market normally continues in the original trend direction. As such, the end of the simple ABC correction is a great place to look to enter a new trade, to take advantage as the main trend resumes.

Let's take a look at an example to show you what I mean.

Here you can see in this example on the SPY, the US stock that tracks the S&P stock index, the market was in a clear downtrend going into the low in July. The market then made a rally, which unfolded as three separate swings, which I have labelled A, B and C on the chart on the previous page. As can be seen, this ABC rally is against the main trend, which was clearly down, therefore this rally would be viewed as corrective.

The first question I hear you asking is: Okay, the market is making a rally off the July low and this rally appears to be unfolding in three swings but how do we know how far this rally will go before it ends? The simple answer is that you don't for sure, however the MTPredictor software program has routines that can project the most likely areas where all of the Elliott waves will end. In this example, as you are looking for the end of the wave C (of an ABC correction) you will be using the typical wave C WPT.

File: (SPY) Standard & Poors Dep R Day Date: 22/08/2002 0:95.60 H: 97.15 L: 95.07 C: 96.68 iewww.W"TPredictor.com

File: (SPY) Standard & Poors Dep R Day Date: 22/08/2002 0:95.60 H: 97.15 L: 95.07 C: 96.68 iewww.W"TPredictor.com

. 'JJ.'J 1 V2_.2'J22 10W2002 IJJIUVJJ.L IQfljemE 1U.2 '22.1/2 _I..'1.IJ'2U2_ 06*B£SCG J.2 ■ J'2U2_ L22 22LU2 L^'1221.U2

As you can see from the chart above, in this example the market has now reached the area of the typical wave C WPT. This is the most likely area where an ABC correction will end.

As we'll see in later chapters the software can calculate and display this level for you automatically.

Now the market is in an area where the ABC correction is most likely to end, the next question I hear you ask is: how do we know the current ABC rally is ending?

For this, the software can automatically colour the bars on the chart red for a sell and blue for a buy.

Here you can see that the last bar on the chart, which was August 22 2002, was painted red. This means that the MTPredictor software program has identified this as a potential sell Reversal Bar.

Let's take a moment and reflect on the current position as of August 22. Firstly, the market (the SPY) was making a three wave rally which is labelled as an ABC correction; secondly, the wave C (of this ABC correction) has now reached the most likely area (the typical wave C WPT) for the entire ABC correction to end; and lastly, the MTPredictor software program has coloured August 22 as a red sell trade set up bar.

Let's see what this looks like on a chart.

As you can see, these three things (the ABC correction, typical wave C WPT, and sell trade set up bar) have all come together on August 22. This is like the three sides of a triangle all coming together to signal harmony entering the market and, as such, this is the area where a turn in this market could unfold.

So, this would be considered an ideal sell trade set-up.

You can now consider entering a new short trade, if, the market in question (SPY) trades below the low of the red sell trade set up bar:

At first sight, this may seem quite involved, however the MTPredictor software program automatically identifies these trade set-ups for you and automatically displays all the information on the chart for you.

Although you can never know for sure whether any trade set-up will turn out as anticipated, the one thing you can control is the initial risk (or the amount to you are likely to lose) when a trade goes wrong. As I have mentioned in the previous chapter, the single most important aspect to any successful trading plan is to keep the initial risk (and therefore your losses) as small as possible.

In this example, the next day (August 23), the SPY declined below 95.07, which was the low of August 22, therefore taking you into a new short trade at a price of 95.06. Your initial protective buy stop would be placed just above the high of August 22 of 97.15 at 97.16. This means your initial risk on the trade would-be 96.06 - 97.16 or 2.1 points (ignoring slippage and commission).

I will be returning to initial risk, and its significance, in a later chapter. So all you need to realise and understand for now is that the initial risk to enter this new short trade is only 2.1 points (ignoring slippage and commission).

However, as I am sure you all realise, if you can enter trades at, or very near, a turn in the market then you can keep your initial risk extremely small.

However, what I would like to stress at this point is how three elements have all come together at the same time to signal a potential change in trend:

1. The market in question (the SPY) was at a level where a high was anticipated to unfold. This was the typical wave C WPT resistance area.

2. The market in question (the SPY) made a red sell Reversal Bar that unfolded right in the typical wave C WPT resistance area.

3. The market in question (the SPY) then declined below the low of the red sell Reversal Bar.

As you see, these three things meant that the SPY was not only at an area where a high was anticipated to unfold but it had also given an indication that a high was likely to unfold (by a red sell Reversal Bar appearing at the WPT), also the SPY (by its own actions) confirmed that the high was complete by declining below the low of the red sell trade set up bar.

Let's see how this turned out:

File: (SPY) Standard & Poors Dep R Day Date: 10/10/2002 0: 77.94 H: 81.07 L: 77.07 C: 00.63

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