Stop loss placement - a specific solution.

One of the biggest problems facing a trader is what to do if a trade goes wrong.

Do you trust your original judgement and hope it turns?

Does your fear of being wrong cause you to close it too soon before it does significant damage?

With WMs, last December 2008 on the DOW, was a nightmare. They kept forming on RSI, then Price, then retracing and taking out the base and then reversing again, lovely trade IF ONLY I'd had stayed in a bit longer.

Problem is, how much longer is "reasonable"?

This idea is based upon a specific situation in EWT as posted by SED on the iii UKX board - this is my interpretation & I have added in the WM idea.

Wait for a clear wave1 with 5 wave substructure.

Wait for the wave2, with a clear 3 wave substructure,to retrace at least 38% of the wave1.

Wait for the WM to form on RSI and establish the base level on Price.

Split the trade into chunks so that the S/Ls take into account the base level on Price and at least two of the Fib levels below that for a W.



I realise that the 80% is not a true Fib level but it is the figure use in a lot of EWT research as signifying a boundary between expected and unexpected. As usual the conditions under which the data was collected is very important, as is an understanding of what the researcher means by "unexpected".

With this example I'd split into three chunks and use below the base, below 62% and below 80%.

It increases the cost compared to just using below the base BUT it adds a reasonable amount of extra space. [IMO, never commit more than 2.5% of your bank to any one trade.]

cheers theory

WMs on RSI in context of EWT waves.

I think of three types of WM "failures", where probably only one of them is really a failure, one is disappointing and one can prove very useful.

The real failure is where it forms on RSI, maybe even Price and then collapses. The only defence being phase out and exit.

The next one does form on RSI, Price and even moves far enough to set up a small loser, break even or maybe small profit before it reverses.

The final category forms on RSI, Price and delivers a good return before retracing and taking out the original shape on Price.

I now feel I can go some way to placing them relative to EWT waves. I am not saying that all EWT waves end on a WM, just that some do.

The purple waves with the ? after them are the unknown next phase.



The failures are more likely to be in the following positions:

at the end of the 1st wave, if the 2nd turns out to be mild;
at the end of the 3rd wave, the 4ths are usually mild;
at the end of the 4th wave, if the 5th truncates.

The disappointing ones probably are:

at the end of the 1st wave, if the 2nd turns out to be neither mild nor sharp;
at the end of the 3rd, if the 4th puts up a bit of a fight but then gives up.

The last category seems to me to be best located:

at the end of the 1st, the 2nd is a high % retrace and then wave 3 kicks in.
at the end of the 3rd, the 4th is a high % retrace and then an extended 5th occurs.

It is possible to get a good return from trading a smallish % retrace of a very big wave OR a big % retrace of a smaller one. However hitting a big % retrace of a big wave is a much easier way of making money.

I hope this helps you with "shot selection". Previous posts have looked at the context of WMs in terms of RSI level, Bollinger, Trendlines, R/S levels and now I am adding EWT waves.

cheers theory