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Trading Educator's Corner

Tom JosephTom Joseph*
Founder of Advanced GET

Focus: Elliott Wave Trading

* Not employed by or affiliated with Interactive Data

Tom Joseph on Trading Elliott Type One Trades

Although I use several trading methods, one of my favorites is an Elliott Type One Buy / Sell, which in Elliott Wave terms, is entering a trade after the completion of a Wave 4 retracement.

I consider the Type One trade the most easily identifiable pattern in an Elliott Wave sequence. And, over the years, I have developed studies and indicators that allow you to make this trade with a high degree of accuracy.

tomWhen using Elliott Wave analysis, one can receive numerous signals. Some of them only become clear after the fact. This might be okay if you're writing a newsletter, but, to make a successful trade, you need patterns you can identify ahead of time with a considerable amount of accuracy. From my experience trading since 1979, the Type One pattern can be identified with a high degree of accuracy prior to its actual occurrence.

After a long Wave 3 rally, profit-taking sets in, and the market enters a retracement phase. While profit-taking continues, others, who are convinced that the trend is still up, continue to enter the market. Once the profit-taking pressure is over, the new participants entering the market will finally push the market to new highs in a Wave 5.

One of the simplest tools we developed for Advanced GET is the Elliott Oscillator. We discovered that this oscillator pulls back to the zero baseline at least 94 percent of the time during this profit-taking retracement. This is a great tool because it lets you stand aside until the profit-taking is over. When the Elliott Oscillator pulls back to zero, it provides a highly accurate area where you can predict that profit-taking is actually over, and the trend is ready to resume.

In addition to this, we created the Profit-Taking Index (PTI), which is designed to be used with the Elliott Oscillator and measures the intensity of the profit-taking. The PTI calculates the magnitude of the profit-taking compared to the previous Wave 3 rally. Historically, if the PTI remains above 35, it indicates a normal profit-taking, which allows the market to resume its trend to a new high. A PTI of less than 35 indicates too much profit-taking and diminishes the odds that the Wave 5 rally will set in.

We also created the Wave 4 Channels, which show up as three lines on the chart (blue, green and red). During a Wave 4 retracement, we would like to see the prices hold above the blue or green channels. Based on statistical observations, this provides 70 percent favorable odds for a quick move to new highs.

Screen 1Let's take a look at an example.

Chart 1 is a daily chart of Occidental Petroleum Corp. (OXY). After a large rally up in Wave 3, this stock is now in a profit-taking phase; the Elliott Oscillator has pulled back to zero indicating that profit-taking may be over. Now, we check the PTI. In the case of the OXY chart, the PTI shows a value of 73. Any PTI of greater than 35 indicates the profit-taking was not excessive. The prices during the pullback have managed to stay above the green channels. With OXY, we now have the three conditions that give us the confidence to step in and buy the market for the next phase, the Wave 5 rally:

  1. Profit-taking is over (Elliott Oscillator pulls back to zero) AND
  2. The profit-taking happened in an orderly fashion compared to historical patterns (as indicated by the PTI being greater than 35) AND
  3. Prices are holding above the green channels.
Advanced GET has also developed a study called the Make or Break (MOB). The MOB is activated from the Wave 3 high and provides a potential target for the upcoming Wave 5 rally. A projection is very important because it allows you to calculate your potential return compared to your initial risk. The risk-to-reward ratio has to be greater than 2 to initiate the trade.

The Ellipse is a Time/Price tool that provides the right time and price for the end of a Wave 4. Typically, we look for the Ellipse to provide support both in respect to time and price. In the case of the OXY chart, the retracement tested the Ellipse support and held very well.

Now, it is time to enter the trade. To confirm the validity of an entry point, we developed the regression trend channel, which contains prices within a set of statistical boundaries. These statistical boundaries are calculated using a standard deviation of 2, which, in essence, means that the area between these boundaries contains approximately 94 percent of the prices. When prices break out of these boundaries, this confirms a change in trend.

Screen 2Now, let's take a look at the actual trade.

As you can see in Chart 2, the actual trade is taken on the cross above the regression trend channels. A protective stop is placed below the previous Wave 4 low. As the prices rally in Wave 5 toward the projected MOB, you can trail standard stops. The trade is exited when the profit target is met.

All of the studies (Elliott Wave, Elliott Oscillator, Wave 4 Channels, Ellipse, PTI and MOB) mentioned in this article (along with others not mentioned here) are available as a version of eSignal called "eSignal, Advanced GET Edition".

For further information on other add-on formula studies, please visit the eSignal Formula Studies Partner page.

Tom's Educator Credentials
Between 1981 and 1986, Tom Joseph developed the Advanced GET software, the world's first and only objective Elliott Wave Analysis Software, for his own trading initially. It was released to the public in 1986. Since that time, he has continued to do research that has contributed to further development of the software, adding numerous new studies. Since 2000, Advanced GET has also been part of the eSignal suite of products and an Advanced GET edition of the eSignal software is now available. At the present time, the Advanced GET edition of eSignal is used by active traders in more than 80 countries of the world.

Throughout his career, Tom has conducted seminars for traders on Elliott Wave trading using Advanced GET. The fact that he is himself an active trader lends credibility to the trading education he offers in these seminars. In fact, Tom has always encouraged his staff to trade in order to live out the Advanced GET motto, "traders helping traders." "Many of our unique studies and tools were developed as a result of my actual trades," says Tom. Advanced GET users appreciate this. They know, when they speak with Advanced GET team members, they are speaking with people who have an experiential knowledge of trading the market. Ultimately, this contributes to more informed and, thus, successful trading by Advanced GET users.

Tom Joseph's Writings
Tom wrote the definitive paper on Elliott Wave analysis using Advanced GET titled, "Practical Applications Of A Mechanical Trading System Using Simplified Elliott Wave Analysis" and a beginner's guide on Elliott Wave theory titled, "Elliott Wave Basics". Read Tom Joseph's paper on "Elliott Wave Basics".
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