One of the longstanding challenges for any trader is when to sell out of a profitable position. In terms of Advanced GET, profit taking mechanisms such as the MOB are invaluable because they address this exact issue. By using Elliott Waves, we can begin to determine whether a MOB is likely to be broken or if the price action will respect it as a viable support or resistance level. While this can be tough to determine in real time, it's not insurmountable. This approach is strictly designated for Type I Trades.
The basic idea of the five wave sequence is pretty straightforward however, there are some detail aspects to Elliott Wave that should be considered. One of these details is the "Principle of Alternation" Waves that focus on the trending parts of the pattern share some relationships with other trending waves (Waves 1, 3 and 5). Corrective waves such as Wave 2 & 4 also share some relationships with one another. Via the principle of alternation, we can make some judgements on the behavior of Wave 5 by looking at the nature of Wave 3.
To determine if Wave 5 will likely move past the MOB, we need to take a look at how Wave 3 behaved. If Wave 3 doesn't exceed 1.618 of Wave 1 then it is not considered an extended Wave 3. If Wave 3 exceeds beyond 1.618 of Wave 1, then Wave 3 is extended.
In the following daily chart of the S&P 500 Index, we can see how the current Wave 3 is not extended because we didn't exceed 1.618. Because of this, we should expect Wave 5 to extend or in other words, move beyond the resistance of the MOB. Remember, the market likes balance. We are simply looking at trends and analyzing how they should balance one another based off of the Fibonacci ratios.
- If Wave 3 is less than 1.618 of Wave 1, then Wave 5 should extend and move above the MOB
- If Wave 3 is greater than 1.618 of Wave 1, then Wave 5 should not extend and will likely respect the MOB.
In this example of the GBP/USD pair, we can see how Wave 3 exceeded 1.618 of Wave 1. Because of this, Wave 5 should not move beyond the MOB.
Not only does this idea work well for Type I Trades, but it can assist with knowing when to be careful with Type II trades; remember, Wave 5's can go on for a while and still maintain divergence. This idea takes some practice and immersion, but with time, it can be a helpful component to determine the length of the Wave 5 continuation and true resistance potential of the MOB.
Trade Smart...
~Duane Gott
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