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Silver Anatomy: Elliot Wave Insights PT II
Greetings, Everyone
In part two of our silver update, I will dive into the structures of Elliott Wave Theory, focusing on Impulse Waves and Corrective Waves.
Let’s break down these components for a deeper understanding.
Understanding the Types of Waves
Impulse Waves (1-3-5)
Impulse waves are powerful, directional moves characterized by strong momentum. These waves typically occur in the direction of the main trend, with Wave 3 often being the most dominant.
Corrective Waves (2-4)
Corrective waves are pauses or pullbacks in the trend, often seen as sideways price action. They take forms such as:
• Flat Patterns
• Triangles
• Zigzags (a sharp, back-and-forth movement).
Using RSI to Analyze Waves
The RSI provides valuable insight into wave structures:
• Vertical lines mark the RSI peaks corresponding to major impulse waves.
• Colored boxes on the RSI panel highlight key areas to watch.
Key Impulse Wave Rules
• Wave 1: Marks the beginning of the trend reversal, confirmed by the RSI breaking above the zero line and the histogram turning green.
• Wave 3: Typically the strongest and longest wave in the sequence.
Key Corrective Wave Rules
• Wave 2: Does not retrace 100% of Wave 1. In this case, note how the RSI dips below the previous impulse level. An expanded flat pattern with a large B-wave exceeding the prior impulse is also evident.
• Wave 4: Should not close below the level of Wave 1.
Rule of Alternation
• If Wave 2 is simple (small), then Wave 4 will likely be complex (large), and vice versa.
Support and Resistance Dynamics
Observe the green boxes in the price chart marking major pivot points, which often signal the end of corrective waves. These pivots align with critical support and resistance levels, frequently igniting substantial rallies thereafter.
Analyzing Bias & Executing
Trading Probability
In my enthusiasm, I anticipated a significant breakout (bias) at the triangle peak of Wave 5, as outlined in my second silver trading post.
I had drawn a triangle breakout expecting an upward move. While my bias led me to the wrong conclusion, my analysis itself wasn’t incorrect—the triangle did break out, but it moved to the downside instead against by bias.
As previously mentioned, when a pattern fails, it often leads to dramatic price action in the opposite direction.
For those who stayed objective and followed the chart rather than their bias, this presented a prime opportunity.
The downside breakout retraced the entire impulse cycle in a remarkably short period of time, showcasing the power of trading without assumptions. It leads to question how can we stay objective while in these trades?
The answer I found is to always be referencing key manual & guides.
Fibonacci Applications for Traders by Robert Fischer provides a valuable solution to the dilemma I encountered (not sponsored or paid, by the way).
In one section, Fischer mentions that “following the Elliott wave concept will lead you to not buy in an uptrend at the end of Wave 3.”
To elaborated more on this idea — it is best to avoid buying wave 4s because Wave 5 is sometimes truncated or fails to materialize altogether, leading to a price reversal.
This insight answers many questions about why wave 5 is so difficult to trade. Will it extend, will it be shorter? Will it be a .618 measurement of wave 1, 1 exact measurement of wave 1, will it extend to 1.618, or will it fail?
One key rule he emphasizes is that, in an Elliott Wave cycle, only three waves may exist under certain conditions—challenging the assumption of a full five-wave sequence.
Trading Strategy Improvements
1. Enter at Wave 2 Retracement Levels
• Focus on taking a large position at Wave 2 retracement levels, but only after confirmation of a reversal.
(Human tendency): We often experience FOMO when prices are high. However, history shows that chasing during high-FOMO moments usually signals a peak. Patience pays off at retracement levels.
2. Pyramid Positions During Wave 3
• Gradually scale aggressively into your position as Wave 3 begins moving with strong momentum. This allows you to capitalize on the high-octane movement of the impulse wave by adding to a winning trade.
3. Exit Around Wave 3.3 or 3.5
• Scale out of your position during the middle or later part of Wave 3. Exiting while the momentum remains strong ensures you lock in gains before the trend begins to fade.
Conclusion
By combining Elliott Wave Theory with RSI analysis, we gain clearer insight into market dynamics, helping us anticipate potential turning points with greater confidence.
In part two of our silver update, I will dive into the structures of Elliott Wave Theory, focusing on Impulse Waves and Corrective Waves.
Let’s break down these components for a deeper understanding.
Understanding the Types of Waves
Impulse Waves (1-3-5)
Impulse waves are powerful, directional moves characterized by strong momentum. These waves typically occur in the direction of the main trend, with Wave 3 often being the most dominant.
Corrective Waves (2-4)
Corrective waves are pauses or pullbacks in the trend, often seen as sideways price action. They take forms such as:
• Flat Patterns
• Triangles
• Zigzags (a sharp, back-and-forth movement).
Using RSI to Analyze Waves
The RSI provides valuable insight into wave structures:
• Vertical lines mark the RSI peaks corresponding to major impulse waves.
• Colored boxes on the RSI panel highlight key areas to watch.
Key Impulse Wave Rules
• Wave 1: Marks the beginning of the trend reversal, confirmed by the RSI breaking above the zero line and the histogram turning green.
• Wave 3: Typically the strongest and longest wave in the sequence.
Key Corrective Wave Rules
• Wave 2: Does not retrace 100% of Wave 1. In this case, note how the RSI dips below the previous impulse level. An expanded flat pattern with a large B-wave exceeding the prior impulse is also evident.
• Wave 4: Should not close below the level of Wave 1.
Rule of Alternation
• If Wave 2 is simple (small), then Wave 4 will likely be complex (large), and vice versa.
Support and Resistance Dynamics
Observe the green boxes in the price chart marking major pivot points, which often signal the end of corrective waves. These pivots align with critical support and resistance levels, frequently igniting substantial rallies thereafter.
Analyzing Bias & Executing
Trading Probability
In my enthusiasm, I anticipated a significant breakout (bias) at the triangle peak of Wave 5, as outlined in my second silver trading post.
I had drawn a triangle breakout expecting an upward move. While my bias led me to the wrong conclusion, my analysis itself wasn’t incorrect—the triangle did break out, but it moved to the downside instead against by bias.
As previously mentioned, when a pattern fails, it often leads to dramatic price action in the opposite direction.
For those who stayed objective and followed the chart rather than their bias, this presented a prime opportunity.
The downside breakout retraced the entire impulse cycle in a remarkably short period of time, showcasing the power of trading without assumptions. It leads to question how can we stay objective while in these trades?
The answer I found is to always be referencing key manual & guides.
Fibonacci Applications for Traders by Robert Fischer provides a valuable solution to the dilemma I encountered (not sponsored or paid, by the way).
In one section, Fischer mentions that “following the Elliott wave concept will lead you to not buy in an uptrend at the end of Wave 3.”
To elaborated more on this idea — it is best to avoid buying wave 4s because Wave 5 is sometimes truncated or fails to materialize altogether, leading to a price reversal.
This insight answers many questions about why wave 5 is so difficult to trade. Will it extend, will it be shorter? Will it be a .618 measurement of wave 1, 1 exact measurement of wave 1, will it extend to 1.618, or will it fail?
One key rule he emphasizes is that, in an Elliott Wave cycle, only three waves may exist under certain conditions—challenging the assumption of a full five-wave sequence.
Trading Strategy Improvements
1. Enter at Wave 2 Retracement Levels
• Focus on taking a large position at Wave 2 retracement levels, but only after confirmation of a reversal.
(Human tendency): We often experience FOMO when prices are high. However, history shows that chasing during high-FOMO moments usually signals a peak. Patience pays off at retracement levels.
2. Pyramid Positions During Wave 3
• Gradually scale aggressively into your position as Wave 3 begins moving with strong momentum. This allows you to capitalize on the high-octane movement of the impulse wave by adding to a winning trade.
3. Exit Around Wave 3.3 or 3.5
• Scale out of your position during the middle or later part of Wave 3. Exiting while the momentum remains strong ensures you lock in gains before the trend begins to fade.
Conclusion
By combining Elliott Wave Theory with RSI analysis, we gain clearer insight into market dynamics, helping us anticipate potential turning points with greater confidence.
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