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The Elliott Waves Theory allows for great risk reward ratios. Not only traders know where price will go, but they can incorporate the time element too.

Price and time represent the two pillars of the holy grail in trading. Knowing where the price goes and when makes a difference between good and excellent trades.

Here’s a quick guide on how to trade with Elliott Waves Theory.

Trading the third wave

One of the groundbreaking rules states that in an impulsive wave, at least one wave needs to extend. By definition, an extended wave must be bigger than 161.8% of the other non-extended waves.

In plain English, it is the longest wave. Typically, the third wave extends.

When this happens, the previous wave (the 2nd one) retraces between 50% and 61.8% of the 1st one. Third-wave extensions happen most of the time.

This gives a perfect trade. In a bullish impulsive wave, simply place a pending buy limit order between 50% and 61.8% of the 1st wave. The take profit is 161.8% projected from the end of the 2nd wave, while the stop loss must be where the impulsive activity starts.

Trading the fifth wave

One of the most powerful rules in the theory is that the first wave should not equal the fifth. This gives traders an educated guess because they already know the 1st wave’s length.

Therefore, Elliott traders simply measure the length of the 1st wave and project the outcome from the 4th wave's end. 5th should be different.