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Elliott Waves Theory – Placing Pending Orders

The trading theory developed by Ralph Elliott is highly regarded among traders, not only for its accuracy, but because it allows clear money management rules to be applied when trading. One of these rules consists of using pending orders as often as possible, as trading with such orders implies that a trading plan is in place. If a trading plan is in place, it means the trader knows exactly when to enter the market (this goes without saying as a pending order can only be placed for future prices); where to put a stop loss (usually at an invalidation level); and what the expected target will be. Pending orders are very useful when trading with Elliott, as this trading theory deals with patterns that are most likely to form. A pending order will be filled when the completed pattern and the price confirm it. If the pending order is not filled, it means eitherthe pattern is still forming, or the whole Elliott Waves count is wrong.

In both cases, using pending orders with Elliott Waves theory is highly recommended. Before moving on to what are the best places to use pending orders with this trading theory, a short review of the types of pending orders is necessary. These pending orders can be placed on any trading platform. When a trader wants to buy from higher levels compared with the current prices, a pending buy stop order should be placed. When the buying is intended to take place at lower levels, a pending buy limit order can be used. For selling, a pending sell stop order can be placed in order to sell from lower levels, or a pending sell limit in order to sell from higher levels. These are the instruments a trader can use to buy or sell from either higher or lower prices.

Where to Place Pending Orders with Elliott Waves Theory

The decision to trade with pending orders is one that should come after wave counting is completed on longer timeframes, and when patterns on those timeframes indicate a specific outcome. Again, it is worth emphasising here that counting or labelling waves should NEVER be done at current prices, as current price action needs to confirm the labelling on the longer timeframes. As mentioned so far here on our Forex Trading Academy, Elliott found that waves are of two types: impulsive and corrective. Based on the type of move the  market is making and where it is forming, pending orders can be used.

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Using Pending Orders with Impulsive Waves

corrections1Impulsive waves offer a great opportunity to use pending orders in order to ride the extended wave. This means that it is mandatory to know what kind of impulsive wave the market is about to form, and one can only know that by trading it. It is impossible to know in advance the type of the impulsive wave (third-, first-, or fifth-wave extension), but it is possible to know that a five-wave structure is about to form. From this moment on, considering the most likely and least likely waves to be extended, a trader can use pending orders to trade. The most likely scenario calls for the third wave to be the extended one, and after the initial spike higher/lower (depending on whether the impulsive move is bullish or bearish), a pending buy limit/sell limit can be placed. You must be careful about the retracement level though! Waiting for the 61.8% retracement level may end up in missing the whole five-wave structure, as such a retracement is not mandatory for the second wave. The stop loss for the pending order should be the beginning of the impulsive wave (start of the first wave), and the take profit can be obtained by calculating 161.8% extension based on the length of the first wave. This will give a general idea of where the third wave will end. If the take profit comes with the price forming a five-wave structure for the third wave, it means a third-wave extension has taken place. However, if the take profit is hit, but the move from the end of the second wave until the end of the third wave is not considered to be impulsive, another pending order can be corrections1placed. Because the move that was supposed to be the third wave is not impulsive, it means it is corrective, and traders start to suspect that a running correction has taken place. (The concept of a running correction will be explained later in our Forex Trading Academy.) The next thing to do is to place a pending buy stop order (if the trend is bullish), or sell stop order (if the impulsive wave is bearish), in order to benefit from the next push that the market makes. This next push should still be equal to 161.8% of the length of the first wave, except that it will be applied from higher/lower levels.

Using Pending Orders with Corrective Waves

When it comes to corrective waves, using pending orders is a bit more complicated. For this, one needs to know whether a correction is a simple or a complex one; and having clarified that, pending orders can be used. In order to prepare for our next subjects to be covered on the Forex Trading Academy, the basic simple corrections will be listed here, illustrating the possibility of trading them with pending orders.

corrections1Pending Orders with Zigzags
A zigzag is a simple correction that has an a-b-c structure, with waves a and c being impulsive, while the b-wave is the only corrective wave. As a rule, the b-wave cannot end beyond 61.8% retracement compared to the a-wave. Therefore, what traders do is to place pending sell limit orders (in a bearish zigzag) or buy limit orders (in a bullish zigzag) in order to find the perfect entry for the c-wave to come.

Pending Orders with Flats
Flats are the most complicated simple corrections, as there are no less than 10 types of flats the market can form. In a flat, which also has an a-b-c structure, only the c-wave is an impulsive one, while waves a and b are corrective in nature.
corrections1As is the opposite to the case with zigzags, it is mandatory for the b-wave to end beyond the 61.8% level. However, it is not recommended to use pending orders to trade the end of the b-wave in a flat, as this one has virtually no limitations. It can easily exceed the start of the a-wave, and therefore one cannot find a safe place for a proper stop loss.

Pending Orders with Triangles
It is very simple to use a pending order when trading a triangle: All you have to do is to identify the b–d trendline and place a pending buy stop order (if the triangle is a bullish one) or a pending sell stop order (if a triangle is a bearish one). Stop loss should be set at the end of the e-wave.

The examples in this article are only meant to show you the importance of having a trading plan, and using pending orders should be part of any trading plan. In turn, this will lead to profitable trades.

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