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# Trading the Elliott Wave Principle – Part 1

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The Elliott Wave Principle allows us to identify the primary trend and its correction. Also, it permits to recognize the maturity of the market, to determine price targets, and to provide a specific invalidation level. In this educational article, we will explain how to trade the Elliott Wave Principle.

Before identifying a trading setup, we have to remember the basic structure of the cycle. Waves 1, 3, and 5 are motives and follow the principal trend direction. Waves 2, and 4 corrects the trend movement and moves in three internal waves. The following figure shows the basic structure of a cycle.

From the Elliott Wave cycle structure, we observe that waves 3, 5, A, and C, are tradeable. Waves 2, 4, 5, and B provide the retracement that generates the opportunities to entry following the direction of the trend.

Wave three characterizes by to be the best profitable movement of an entire Elliott Wave cycle. The following chart shows the way to trade wave three.

To place our entry, we have two options. The first alternative is following the retracement level, which could extend from 38.2% to 78.6%. The second alternative is to place the order after the wave B breakout.

The profit target is at least 100% of the Fibonacci projection from the origin, wave 1, and wave 2. Remember, the wave three rule “is not the shortest.” The second target is 127.2%, and the final corresponds to 161.8%.

The invalidation level is below the origin of wave 1; remember the rule “Wave 2 never moves below wave 1.” An alternative level is to set the invalidation below the end of wave C.

## Wave three in action

Dow Jones Transportation (DJT), in its 8-hour chart, shows a bullish sequence that started on January 20, 2016, when the price found buyers at 640.33 pts. The first rally drove to DJT until 814.90 pts on April 20, 2016.

After this high, the price action retraced in three waves as an A-B-C sequence, piercing 61.8% of the Fibonacci retracement. From the chart, we observe the two possibilities to place the entry to the market. The first alternative is to go long between the 50% and 61.8%. The second one is to wait for a wave B breakout above 795.06 pts.

DJT reached the first target at 876.58 pts in the first half of November 2016. While the second target, located at 923.92 pts in early December 2016. However, DJT touched the third target at 984.21 pts on September 27, 2017.

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Eduardo Vargas is a technical analyst and independent trader based in Buenos Aires, Argentina. He is an Industrial Engineer and holds a Master in Finance degree. In 2008 began to trade Chilean stocks listed on IPSA. From 2013 started to trade CFDs on Forex, Commodities, Indices and ETFs markets. He analyses different markets combining the Elliott Wave analysis with Fibonacci tools. He provides a market mid-long-term vision.