What Makes for a "Good" Elliott Wave Opportunity?
New insights from our European Stocks Intraday analyst
by Alexandra Lienhard
Updated: March 31, 2016
In this new Q&A with Murat Yilmaz, our European Stocks Intraday Analyst, you'll learn how the Wave Principle helps you see new trade opportunities, what he considers a "good" opportunity, the importance of risk management and more.
Alexandra Lienhard: First, a "dumb" question: Are Elliott wave patterns in European markets the same as in the U.S. ones? Or does geography make a difference?
Murat Yilmaz: Yes, Elliott wave patterns are the same in European markets as they are in U.S. markets, in Asian markets, in intraday charts, in monthly charts, even in multi-year charts. The Elliott Wave Principle is a model that describes how financial prices move up and down in specific patterns, regardless of geographic location or timeframe.
Investor psychology swings from optimism to pessimism and back in a natural sequence that creates specific, measurable price patterns. Since the fluctuations in investor psychology are self regulated, the swings are not affected by outer causes but have an inner dynamics. These patterns don't change. So, we observe the same Elliott wave patterns occurring again and again in any financial setting everywhere around the globe. That's what makes markets predictable.
Alexandra: Your service helps subscribers find short-term market opportunities. What do you consider a "good" Elliott wave opportunity?
Murat: The Elliott wave method allows you to set a price target and a stop before entering a potential trade. You can put a stop near Fibonacci reversal points, for example. Fibonacci retracements are a time-tested method to determine key support and resistance levels -- those levels which, if breached by price action, either confirm or negate your wave forecast. So, the best trading opportunities arise when a clear Elliott wave pattern completes near a Fibonacci retracement point. For example, when you see a 5-wave rally that you've labeled wave 1, and then you see a 3-wave decline that you've labeled wave 2 -- and that decline has stalled after retracing a Fibonacci 61.8% of the 5-wave rally. That's a good bullish opportunity. However, we always want to wait for price action to confirm the newly started trend we want to participate in. In other words, you want the price to actually turn up after hitting that Fibonacci retracement point -- and even better, turn up in a small-degree 5-wave move, indicating a change in trend. Then you're really on to something.
Alexandra: So, what European stock index is presenting a "good" Elliott wave opportunity for traders right now?
Murat: Let me start by saying that Wave principle also helps identify countertrend moves --three-wave moves that "correct" the preceding 5-wave impulse waves. Here's a tip I've picked up over the years: The weakest acting market during a countertrend move will usually be the strongest one when the main trend resumes. The SMI (Swiss Market Index) was very weak during the latest rally so we'll be keeping our eye on that market, which we think is in a countertrend correction. Corrections are opportunities for traders to position themselves in the direction of the larger trend of a market -- which, in the SMI.
Alexandra: The coverage you provide for EWI focuses on short-term Elliott wave patterns in European stock indexes. Can you explain why it's important to pay attention to the small-degree wave patterns and not just the larger-degree ones?
Murat: You get more out of a trend when you follow both the smaller-degree wave patterns and larger-degree ones. To maximize profit and minimize risk, you need to know when to get on the train early and step out of it before it's too late. Keeping an eye on smaller-degree wave patterns, while paying attention to the larger degree trend, helps you know when to act on the messages received from smaller-degree wave patterns.
Alexandra: There's been a lot of volatility in 2016, in both European indexes and globally in most markets. How do you approach volatility on a short-term basis?
Murat: Risk management is key when dealing with a high volatility environment. In our Pro Service analysis, we always provide a specific risk management level together with the preferred scenario. And it's important to note that we don't hesitate to change our view when the risk level is hit.
(Editor's note: Murat Yilmaz's intraday forecasts focus on the FTSE, DAX, SMI & Stoxx 50. Learn more about his service here.)
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