By Gary Grimes
The following article is adapted from market analysis by Elliott Wave International Chief Commodity Analyst Jeffrey Kennedy. Learn more here.
Wave patterns are like beautiful women, classic cars and great art – you know them when you see them.
EWI analyst Jeffrey Kennedy drives this point home during his live Elliott wave trading tutorial. It's my favorite of his tips for trading with Elliott waves.
"Trade the pattern not the count," Jeffrey says.
If you don't recognize a pattern at a glance, don't trade it – plain and simple. After all, your wave count can be wrong; the pattern cannot.
Does that mean you must know the exact wave count at a glance, as well? No. Simply spotting a pattern you recognize is where you should start.
Jeffrey scans hundreds of charts, clicking through them one by one, spending mere seconds with each. If he doesn't spot a pattern he recognizes, a click of his mouse takes him to another potential opportunity.
Does price action look extended or choppy? Is it trading in a channel? Is it forming a wedge or triangle shape? These are some of the signals Jeffrey's looking for. Each could help him identify – at the quickest of glances – whether price action is impulsive or corrective. This is the first critical step, Jeffrey says, to spotting high-confidence, Elliott wave trade setups.
That brings us to the following chart. Do you see a pattern you recognize? I do.
Look at the downward price action; the moves look decisive, almost in straight lines like impulse waves. Now look at the upward moves; they look indecisive and choppy like corrections. There's also one down move that is clearly longer than the others – that's almost certainly a third wave of some degree.
At just a glance, here are a few things we can determine:
- This is a bearish market pattern, because downward impulses are interrupted by upward corrections.
- The price action from September to November seems to be a pretty clear wave 3 down, followed by waves 4 up then 5 down, completing what appears to be a larger degree wave 1 in early March.
- Wave 2 follows wave 1, so the upward move starting in early March is most likely a larger degree wave 2.
- Wave 3 follows wave 2, so that's what we can expect next.
- Wave 3 is never the shortest and often the longest of all five waves, so we can expect the next impulse move to take prices to new lows.
You see, with just a quick glance, we've put a finger on the pulse of the market. Negative psychology pulls prices down, and brief reversals of mood result in upward corrections – this appears to be a long-term bear market.
If you can gain this much insight simply by glancing at a chart, just think of what else you can glean by spending more time with it. Look at this pattern within a longer time frame, and you can determine the degree of trend (this one appears to be primary). Formulate Fibonacci price and time targets, and you can be confident about when and where prices will most likely turn.
There are literally hundreds of things you can do with a good chart, but none of them mean much unless you can first identify a pattern you recognize.
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For more information on trading successfully, visit Elliott Wave International to download Jeffrey Kennedy’s free report How to Use Bar Patterns to Spot Trade Setups.
Gary Grimes focuses on mass psychology, U.S. stocks and the U.S. economy. Gary has a bachelor’s degree in journalism from Auburn University in Auburn, AL, where he was first turned onto the Austrian School of economics by way of the world-famous Mises Institute. His study of classical liberalism eventually led him to discover the Elliott Wave Principle and Robert Prechter’s theory of socionomics.
Full disclosure: This is not an usanbied perspective, as the reviewer has developed a warm friendship with the author (Peter Brandt).With that said, hopefully you can overlook the bias for two reasons:* Having read literally hundreds of trading books over the years most of them mediocre, a small handful worth revisiting your reviewer knows excellence when he sees it. By any standard, this book stands out.* The author, Peter Brandt, has the ultimate in trader bona fides: An audited track record, spanning 30 years, of better than 41% compound returns! (No, that is not a typo.)So with that out of the way, let’s begin There is an old saying among professional racetrack handicappers: The losing player is the one who tells you he breaks even; the breakeven player is the one who tells you he is a consistent winner; and the winning player is the one who tells you it’s a tough, tough game, with great dedication required for success.Peter Brandt, a lifetime winner in the great game of trading, falls in the third category. While clearly someone who loves the game, he does not shy away from the hard realities of trading.In describing his method of trading, Brandt comes across as refreshingly humble, underscoring that his approach is far from the only approach, cheerfully adding that other methodologies may be superior. (Though of course the vast majority of money managers would give a kidney, or maybe even a lung, for compound returns like his.)From a position of humility, sincerity and strength, Brandt successfully explodes the following myths: * The myth that inside information, hidden keys, or some other form of secret knowledge is what matters.* The myth that percentage of winning trades is a meaningful measure of long-run trading success. (In fact the opposite may be true an unhealthy focus on winning percentage can NEGATIVELY impact one’s chances of success.)* The myth that winning traders never experience setbacks, periods of trading frustration, or emotional challenges as mere mortals do.Next to honesty, what shines forth from Diary is a stunning sense of clarity: Clarity of purpose, clarity of execution and methodology, and clarity of operational procedures from start to finish.It is a beautiful thing to approach markets with a quiet confidence. Not every day will be a winning day, but every day can be infused with a sense of deep calmness, in respect to having a good plan and executing on that plan.As a thirty-year veteran trader who understands the vital importance of comprehensive planning, Brandt exudes this desirable sense of calmness and, through the explanation of his methodology, teaches others how to cultivate it.Just consider how many traders (perhaps you at one time?) have gotten lost in a fog of anxiety, or otherwise lost on the murky unmarked byways of an endless holy grail quest. Method after method, indicator after indicator or consider how many traders agonize over the decision making process, never 100% clear what a signal is or whether the present signal is worth taking.If you have uncomfortable familiarity with any of the above issues, this book could be a drink of cool water in the parched desert (or perhaps a bucket of refreshing ice water splashed in one’s face). With sufficient methodological development and consistent planning, there is no need for ambiguity. As Brandt shows, a skilled trader can develop sufficient insight, conviction and rule-based engagement tools to know EXACTLY what a signal is, and exactly how to act on it.And finally, last but not least, Brandt’s book is a wonderful, powerful testament to price.In earning his stellar compound returns over the course of three decades, Peter Brandt more or less did it via price and price alone. The charts presented are beautifully unadorned, as is Brandt’s methodology in general. There are no esoteric tea-leaf concoctions here the regular hodge-podge of indicators that clutter up most charts are completely absent (and not at all missed). Hawkers of complicated bells and whistles should fear this book!Brandt also does a service to traders in drawing attention back to classical chart patterns, in the context of the extended time frames required for full development of those patterns. Whereas too fine an eye for pattern will find it anywhere, as the old saying goes, Brandt is very selective in the patterns he acts upon, preferring development time of weeks to months for the generation of true best dressed or best in class trades.In conclusion: No matter your present depth of trading experience, this book could open your eyes. (If you can already see, they may be opened a little wider.)Anyone who seeks a path out of the dead-end labyrinth of esoteric guru Read more