Elliott Wave – Isolation Approach
In the last section we saw, that no matter how good the Elliott Wave Pattern looked at the time, more times than not it broke down and the anticipated forecast did not unfold. The reason for this was that markets tend to go in Cycles, what I call the. Cyclical nature of Markets, so any Technical Analysis approach can only be reliably used about 50% of the time, and this includes Elliott Wave Analysis. So, after a lot of research it dawned on me that trying to use Elliott Wave in the way it was traditional taught would never work because the idea of being able to make a forecast 100% of the time in a Market that was only in a clear pattern about 50% of the time was not sensible. The solution became obvious, what if I only tried to use Elliott Wave Analysis when the Market pattern was clear? This meant that Elliott Wave could only be used about 50% of the time, the other 50% of the time (when the Market Pattern was unclear) it was better doing nothing. And so my Isolation Approach to Elliott Wave Analysis was born !
For me, this made perfect sense, because as a Trader (rather than an Analysist), all we need to know is how to uncover a Trade setup, so all we needed was a unique point in time when the Market was in a position where you could enter a trade with a small control initial risk. In other words, you just needed to know the pattern at that time. Then you use correct Position Sizing (more on this in other parts of this web site) to keep the initial risk small. Then over time, if you make trades where the Profits are larger than the losses then you have the basis for a successful approach to Trading. It did not matter that about 50% if the time the market pattern was unclear, because as Traders we are not looking to know where the market is going all the time, we are just looking for Tradable opportunities when the market pattern is clear.
This then formed the basis of my unique Isolation Approach to Elliott Wave.
That is all well and good, I can hear you ask, but how do we know when to start the Elliott Wave Pattern. Again, the answer was remarkably obvious, we look to the higher time frame charts. We have all heard that it is important to make sure your analysis fits in with the higher time frame, so why not use the same approach with my Isolation Approach to Elliott Wave. Again, from my own research, I discovered areas of Support or Resistance that very often produced a turn in the market, I called these Decision Points (DP’s). As such, the best place to start a new Elliott Wave sequence was at an area of DP support / resistance on the higher time frame chart.
If any of you have studied Elliott Wave before you will know that it can become incredibly complicated with Alternate Wave counts and complex corrections. But the only reason these have been introduced is to try and cope with the times when the traditional Wave Theory breaks down. Because we are now only looking to do Analysis when the market pattern is clear, we no longer need any of these more complex or confusing parts of the traditional Elliott Wave theory. This then simplified things considerably, where we can focus on the simplest Elliott Wave Pattern of all, the ABC correction.
This was great, because the most common place an ABC correction unfolded was in the Wave (2), and what followed a Wave (2), a Wave (3), which is usually the strongest and longest swing in a completed Elliott Wave sequence. So, by simplifying the Elliott Wave Theory and only using it in Isolation (when the Market Pattern is clear) we had the potential to uncover what I (personally), think is one of the best trades you can get. Being able to enter a market as the Wave (2) is ending (with a small controlled risk) to then be able to trade what is potentially the longest swing (where the largest profit is available). In other words, the smallest initial risk for the largest Profit potential.
I hope this gives you an overview of how and (more importantly) why I developed my unique Isolation Approach to Elliott Wave. To be able to take the best (and simplest) parts of the Traditional Elliott Wave theory and then apply then into the real world where Markets go through Cycles and their pattern is only clear about 50% of the time. My unique Isolation Approach to Elliott Wave then became the basis of the MTPredictor software program that was launched in 2001.