Wave Structure Trade

Entry Logic

• Entry trigger: Based on Elliott Wave theory, enter a long trade at the start of Wave 3 or Wave 5, which are the primary motive waves.
• Confirmation: Wave 2 completes a 50% or 61.8% retracement of Wave 1, and a bullish reversal candle forms.
• Timeframe: 4-hour chart for wave count, 1-hour for entry.
• Location context: Within a larger, developing uptrend.
• Market condition: A new, impulsive trend is beginning.

Exit Logic

• Profit target: The 1.618 extension of Wave 1 for Wave 3, or the previous high for Wave 5.
• Scaling out: Scale out 50% at the 1.0 extension of Wave 1.
• Trailing stop: Trail the stop below the low of the previous 4-hour candle.
• Signal failure exit: Exit if Wave 2 retraces more than 100% of Wave 1.
• Opposite signal exit: Exit if a clear 5-wave impulse pattern completes and a corrective A-B-C pattern begins.
• Time expiration: This is a multi-day or multi-week trade; no fixed time expiration.
• Momentum loss: Exit if momentum diverges significantly on the daily chart near the end of Wave 5.

Stop Loss Structure

• Hard stop: Just below the start of Wave 1.
• Soft stop: A 4-hour close below the 78.6% retracement of Wave 1.
• Max dollar loss: $600 per trade.
• Max percent loss: 2.5% of account.
• Structural stop: The origin of Wave 1.

Risk Management Framework

• Risk per trade: 1.5% of account.
• Daily limit: Not applicable (swing trade).
• Weekly limit: Not applicable.
• Max drawdown: 20%.
• R:R requirement: Minimum 3:1.

Position Sizing Model

• Sizing approach: Position size based on the distance to the start of Wave 1.
• Volatility adjustment: Use the daily ATR to normalize risk.
• Conviction sizing: Use a larger size for Wave 3 entries, smaller for Wave 5.
• Scaling in: Add to the position at the start of sub-wave 3 within the larger Wave 3.
• Scaling out: At Fibonacci extension targets.

Trade Filtering

• Market conditions to avoid: Choppy, sideways markets where wave counting is unreliable.
• Setups required: A clear 1-2 wave setup at the beginning of a new trend.
• Instruments: Stock indices, major cryptocurrencies, and blue-chip stocks.
• Time restrictions: Not applicable.
• Chop/news avoidance: Be aware of how major news can either initiate or terminate a wave sequence.

Context Framework

• Trend direction: The beginning of a new major trend.
• VWAP relationship: Not relevant for this timeframe.
• MA relationship: The 50-day SMA should be turning up at the start of Wave 1.
• Range location: Breaking out of a long-term accumulation range.
• Higher TF alignment: The weekly chart should confirm a potential bottoming and reversal.

Trade Management Rules

• Breakeven: Move stop to breakeven once Wave 3 clearly breaks the high of Wave 1.
• Scale out: At key Fibonacci extension levels.
• Add size: During smaller pullbacks within the main impulse wave.
• Fast vs slow moves: Wave 3 is typically the fastest and strongest wave; hold on.

Time Rules

• Optimal window: Not applicable.
• Times to avoid: Not applicable.
• Session notes: The start of a new trend can happen at any time.

Setup Classification

• A+ criteria: A textbook 1-2 setup with a clear A-B-C correction in Wave 2, followed by a strong breakout.
• A criteria: A clear impulse wave followed by a valid retracement.
• B criteria: The wave count is ambiguous or unclear.
• C criteria: The market is in a clear corrective pattern (A-B-C) on the higher timeframes.

Market Selection Criteria

• Instruments: SPY, QQQ, AMZN, BTC-USD.
• Volume: Volume should expand significantly during Wave 3.
• Volatility: Should be expanding.

Statistical Edge Metrics

• Win rate: 40% (wave counting is subjective).
• Avg win: 8R+.
• Avg loss: 1R.
• Profit factor: 3.2+.
• Expectancy: Very high due to the large size of winning trades.

Failure Conditions

• The wave count is incorrect, and what appears to be a Wave 1-2 is actually part of a more complex correction.
• Wave 3 fails to be longer or more powerful than Wave 1.

Psychological Rules

• Requires a deep understanding of Elliott Wave principles and a high tolerance for subjectivity.
• Must have the patience to hold through multi-week trends.

Advanced Components

• Regime detection: This is a trend-initiation strategy.
• Filters: Use MACD or RSI divergence to help identify the end of Wave 5.
• Correlation: The wave count should be confirmed by similar patterns in correlated assets.
• MTF alignment: The wave count should make sense within the larger weekly and monthly context.

Location

• Strongest: At the end of a major bear market or long-term consolidation.
• Weakest: In the middle of a choppy, sideways market.