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 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 pattern completed and price confirmed it, or, if the pending order is not filled, it means the pattern is either 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 into what are the best places to use pending orders with this trading theory, a short review of the types of the pending orders is necessary. These pending orders can be placed on any trading platform. When a trader wants to buy from higher levels when 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 bigger time frames and patterns on those time frames indicate a specific outcome. Again, it is worth emphasizing here that counting or labeling waves should NEVER be made at current prices, as current price action needs to confirm the labeling on the bigger time frames. 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 the move a market is making and where it is forming, pending orders can be used.
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Using Pending Orders with Impulsive Waves
Impulsive 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 now that only by trading it. It is impossible to know in advance the type of the impulsive wave (3rd, 1st, or 5th wave extension), but it is possible to know that a five-waves structure is about to form. From this moment on, considering the most likely and least likely wave 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 if the impulsive move is bullish or bearish), a pending buy limit/sell limit can be placed. Careful about the retracement level though! Waiting for the 61.8% retracement level may end up in missing the whole five-waves structure as such a retracement is not mandatory for the 2nd wave. The stop loss for the pending order should be the beginning of the impulsive wave (start of the 1st wave), and the take profit can be obtained by calculating 161.8% extension based on the length of the 1st wave. This will give a general idea about where the 3rd will end. If the take profit comes with price forming a five-waves structure for the 3rd wave, it means a 3rd wave extension has taken place. However, if the take profit is hit but the move from the end of the 2nd wave until the end of the 3rd wave is not considered to be impulsive, another pending order can be placed. Because the move that was supposed to be the 3rd wave is not impulsive, it means it is corrective, and traders start to suspect a running correction took 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 will make. This next push should still be equal with 161.8% of the length of the 1st wave, only 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 if a correction is a simple or a complex one, and upon clarifying 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 to trade them with pending orders.
Pending Orders with Zigzags
A zigzag is a simple correction that has an a-b-c structure, and waves a and c are impulsive, while the b-wave is the only corrective wave. As a rule, the b-wave cannot end beyond 61.8% retracement when compared with the a-wave. Therefore, what traders do is to place pending sell limit orders (in a bearish zigzag) or buy limit ones (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 ten types of flats the market can form. In a flat, that has an a-b-c structure as well, only the c-wave is an impulsive one, while waves a and b are corrective in nature.
As opposite to zigzags, the b-wave is mandatory 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 trend line 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 would lead to profitable trades.
Other educational materials
- Types of Contracting Triangles
- Special Types of Triangles
- Types of Expanding Triangles
- Trading with X Waves
- The Concept of a Running Correction
- Double Three Running Patterns