Trading rules The market does not owe me a thing. I’m lucky to be able to trade it and will take what I can get. Anticipate entries – reacting to market is death. If you think there is easy money in the market – you are the easy money. Formal education will make you a living. Self education will make you rich Have the courage to take massive profits when available, but strive for singles. Work tirelessly to decrease your average stop loss size. Do not trade F.Y.E – for your entertainment. Expect to make 70% of your profits during 30% of the time If you wantsa to be here for the good times, you gotsa to be here all the times (CME). PLAN YOUR TRADE – TRADE YOUR PLAN.

Class Outline The impulsive 5-Wave pattern Extensions Motive vs Corrective Waves The impulsive 5-Wave pattern Trader psychology within the Wave count Rules of the 5-wave motive pattern A-B-C correction basics Fractal wave counts Wave labels Motive Wave Variations Extensions Ending & leading diagonals Live Trade Examples

Basic 5-Wave Pattern 5 3 Wave 5 Wave 4 Wave 3 1 4 Wave 2 Wave 1 2

The 5-Wave Pattern Wave 3 - Strong, deliberate, and extended price action Fundamentals increasingly better - Investor confidence greatly improved 5 3 Wave 5 Wave 4 Wave 1 - Fundamentals poor - Investors fully, bearish expecting new lows Heavy short selling Wave 3 1 4 Wave 2 Investors fully bearish, certain of new lows - Heavily retraces W.1 - Fundamentals horrible, doom and gloom Volumes light, as sellers dry up Wave 2 Wave 1 2

The 5-Wave Pattern 5 3 Wave 3 is often the longest, but it is never the shortest Wave 5 Wave 4 Wave 4 can NOT retrace more than 100% of Wave 2. Wave 3 1 4 Wave 2 Wave 1 Wave 2 can NOT retrace more than 100% of Wave 1. 2

Motive Waves 1 Motive Waves break down into 5-waves and are In line with the higher degree trend .5 .3 Motive waves are labeled with numbers. .4 .1 Waves 1,3,5 are motive .2

Label The Trend Waves

Trend Wave V

Motive What’s the difference? Diagonal Motive Wave .iii .iv .ii .i .v c c a c a b b a b Diagonal Motive Wave Motive Impulsive Wave Motive = 5 Wave Structure Motive Impulsive = 5 Wave Structure + Follows Impulsive Rules Tip : Wave 4 usually over laps into Wave 1 territory.

Motive Impulse Pattern Rules of the 5-Wave Pattern 1 3 4 5 2 1 2 3 5 4 Wave 2 can NOT retrace to the beginning (or beyond) of Wave 1. Wave 4 can NOT touch Wave 2. Wave 3 is often the longest, but it is never the shortest.

Motive Diagonal Pattern 1 3 4 5 2 Wave 2 can NOT retrace to the beginning (or beyond) of Wave 1. 1 3 4 5 2 Wave 4 MUST touch Wave 2. Wave 1 often the longest, and wave often 5 the shortest, but wave 3 never the shortest

Diagonal Triangles Motive, yet NOT impulsive Ending Diagonal .iii .iv .ii .i .v .i .ii .iii .iv .v Ending Diagonal Leading Diagonal

Ending Diagonal 1 (c) (a) (b) 2 Motive, yet not impulsive. .iii .iv .ii .i .v (a) (b) (c) 1 2 Motive, yet not impulsive. Occurs at termination points of larger degree, exhaustive points. Common in W.5, sometimes C of A-B-C W.5 ends in a ‘throw-over’ break of the trend line of W1 & 3 Subdivides into 3-3-3-3-3

Leading Diagonal Subdivides into 5-3-5-3-5. .ii .iii .iv .v Subdivides into 5-3-5-3-5. 5-wave subdivisions convey continuation, unlike 3-wave subdivision of ending diagonals. Occurs in W1 of impulse, or WA or a Zig-Zag. Contains converging trend lines. Motive, yet not impulsive.

Specific Wave Guidelines 5 3 B Wave 5 Wave A Wave 4 Wave B Wave 1 Wave C 1 Wave 3 4 A 1 2 3 4 5 Wave 2 C Wave 1 2

Wave One Guidelines Price Structure Ratios & Relationships Should subdivide in 5 smaller degree waves. Will be either impulse or leading diagonal. Ratios & Relationships Should coincide with shallow retracement from larger-degree wave (i.e. 23.6% or 38.2%). Trading Tactics Be very selective trading. Too little is known about newly formed motive wave. If anything, short completion into Wave 2 lower.

Wave One Guidelines Price Structure Should subdivide in 5 smaller degree waves. Will be either impulse or leading diagonal.

Wave One Guidelines Ratios & Relationships Should coincide with shallow retracement from larger-degree wave (i.e. 23.6% or 38.2%).

Wave One Guidelines Trading Tactics Be very selective trading. Little is known about newly formed motive wave. Wave 1 should be larger than previous corrections. Consider short entries at end of smaller W5 of larger W1 into larger W2.

Specific Wave Guidelines 5 3 B Wave 5 Wave A Wave 4 Wave 2 Wave B Wave C A B C 1 Wave 3 4 A Wave 2 C Wave 1 2

Wave Two Guidelines Price Structure Ratios & Relationships Price structure usually an A-B-C Zig-Zag formation. Extreme bearishness as Wave 1 lows are approached. Wave 1 low can NOT be exceeded. Ratios & Relationships Typically retraces 50% - 78.6% of Wave 1. Often Wave A = Wave C, or Wave C = 0.618 of Wave A Trading Tactics Quality long entry locations are below 50%, but above 78.6% retracement of Wave 1.

Wave Two Guidelines Price Structure Usually an A-B-C Zig-Zag formation. Extreme Bearishness as Wave 1 lows are approached. Wave 1 low can NOT be exceeded. Usually a ‘Simple’ & deep correction.

Wave Two Guidelines Ratio & Relationships Typically retraces between 50-78.6% of Wave 1 Often Wave A = Wave C. Or, Wave C = 0.618 of Wave A In equities Wave 2 typically ends on low volume.

Wave Two Guidelines Trading Tactics Quality long entry locations are below 50%, but above 78.6% retracement of Wave 1. Or, if A = C between 50% to 78.6% retracement Stop losses should be placed below Wave 1 lows.

Wave Two Guidelines

Specific Wave Guidelines 5 Wave 3 3 B Wave 5 1 2 3 4 5 Wave A Wave 4 Wave B Wave C 1 Wave 3 4 A Wave 2 C Wave 1 2

Wave Three Guidelines Price Structure Ratios & Relationships Usually the strongest & longest, but never the shortest wave. Should be able to identify 5 waves of smaller degree within Wave 3, that meet all the rules of an impulse wave. Ratios & Relationships Once Wave 1 high is exceeded, minimum objective of Wave 3 is 100% projection of Wave 1 measured up from Wave 2 bottom. Ideally, Wave 3 travels between 161.8 – 261.8% of Wave 1 measured from Wave 2 bottom. Trading Tactics If not long from Wave 2, longs can be taken on break of Wave 2 highs targeting 161.8 or 261.8% projection of Wave 1. Stops directly below Wave 2 low.

Wave Three Guidelines Price Structure Usually the strongest, but never the shortest wave in the sequence. Should be able to identify 5 waves of a smaller degree within Wave 3, that meet all the rules of an impulsive wave.

Wave Three Guidelines Ratios & Relationships Once Wave 1 high is exceeded, minimum target of Wave 3 is 100% projection of Wave 1 measured from Wave 2 bottom. Ideally Wave 3 travels between 161.8% - 261.8% of Wave 1 measured from Wave 2 bottom.

Wave Three Guidelines Trading Tactics If not already long from Wave 2, longs can be take on break of Wave 1 highs targeting 161.8% & 261.8% projection of Wave 1. Stops directly below Wave 2 low. If 161.8% projection is not at least 1.5 times greater than your stop loss, pass. If market hesitates as 100% projection of Wave 1 up from Wave 2, likely a C Wave, tighten stops or exit position.

Trading Characteristics of Individual Currencies Wave Three Guidelines

Specific Wave Guidelines 5 Wave 4 B A B C Wave 5 Wave A Wave 4 D Wave B Wave C E 1 Wave 3 4 A Wave 2 C Wave 1 2

Wave Four Guidelines Price Structure Ratios & Relationships If wave 2 was a simple A-B-C, expect wave 4 to be shallow & complex. Triangle or Flat Correction possible. Wave 4 must be at least 1 pip below Wave 3 high. Complex corrections (W-X-Y) possible. Ratios & Relationships Typically retraces 23.6 – 50.0% of wave 1-3. Total time elapsed in wave 4 should be at least 1.5 times elapsed time of wave 2. Trading Tactics Best to stay out of a Wave 4 as it typically is long and drawn out. Only acceptable entry is upon completion of a single or complex flat or triangle in Wave 4 for Wave 5 move to new highs. Do not enter if Wave 4 has not retraced at least 38.2% of Wave 3 unless Wave 4 corrective structure is clearly done.

Wave Four Guidelines Price Structure If wave 2 was simple A-B-C, expect Wave 4 to be shallow & complex. Triangle, Flat or Complex (W-X-Y) corrections possible & likely. Upon completion, Wave 4 must be at least 1 pip below Wave 3 high.

Wave Four Guidelines Ratios & Relationships Typically retraces 23.6% to 50% of waves 1-3. Total time elapsed in Wave 4 should be at least 1.5 times elapsed time in Wave 2.

Wave Four Guidelines Trading Tactics Best to stay out of Wave 4 as it typically long & drawn out. Only acceptable entry is upon completion of a single or complex flat or triangle in Wave 4 for Wave 5 move to new highs. Do not enter if Wave 4 has not retraced at least 38.2% of Wave 3 unless Wave 4 corrective structure is clearly finished.

Specific Wave Guidelines 1 2 3 4 5 5 3 B Wave 5 Wave A Wave 4 Wave B Wave C 1 Wave 3 4 A Wave 5 Wave 2 C Wave 1 2

Wave Five Guidelines Price Structure Ratios & Relationships Final wave in sequence before corrective reversal begins, possibly more. Can be either an impulse or an ending diagonal, but must have 5 waves. Will usually show indicator divergence in Wave 5 as compared to Wave 3. Ratios & Relationships Wave 5 completes at: 200% - 261.8% projection of Wave 1 up from Wave 2. 38.2% - 61.8% projection of Waves 1-3 up from Wave 4. 127.2% - 161.8% external retracement of Wave 4. 161.8 – 423.6% external retracement of Wave 2. If Wave 3 was extended, expect Wave 5 to be equal in distance to Wave 1. Very powerful relationship. If not, look for Wave 5 to be 61.8% of Wave 1. Will often terminate in Fib clusters.

Wave Five Guidelines Trading Tactics Fading completed 5 wave sequences is vital to professional trader’s arsenal. There will be overwhelming evidence to do so, but the risk can be quite low. Before fading a completed 5 wave sequence, go to 1 lesser degree and identify another 5th wave completion. Stops go just above your 5th wave high. Take profits on majority of your position after 3 wave correction.

Wave Five Guidelines Price Structure Final wave in sequence before corrective reversal begins, possibly more. Can be either an impulse or an ending diagonal, but must have 5 waves. Will usually show momentum indicator divergence in Wave 5 as compared to Wave 3.

Wave Five Guidelines Ratios & Relationships Wave 5 completes at : 200% - 261.8% projection of Wave 1 up from Wave 2. 38.2% - 61.8% projection of Waves 1-3 up from Wave 4. 127.2% - 161.8% external retracement of Wave 4. 161.8% - 423.6% external retracement of Wave 2.

Wave Five Guidelines Ratios & Relationships If Wave 3 was extended, expect Wave 5 to be equal in distance to Wave 1. Very powerful relationship. If not, look for Wave 5 to terminate at 61.8% of Wave 1. Will often terminate into clusters of various fib retracements.

Wave Five Guidelines

Wave Five Guidelines Trading Tactics Fading completed 5 wave sequence is vital to a traders arsenal. Before fading a completed 5 wave sequence, go to one lesser degree & identify another 5-th wave completion. Stops go just above the 5th Wave high. Take profits on majority of your position after a 3 wave correction.

Wave Five Guidelines Daily Chart 4 Hour Chart

Motive vs. Corrective Motive Corrective

Corrective Wave Variations Corrective waves work counter to the trend of one large degree, often with hesitant, choppy price action. Most often, corrective waves are 3-waves, but never 5-waves, and are difficult to label in real time and trade.

3 Wave A-B-C Corrective Pattern Wave B Wave C A C

Complete 8 Wave Pattern 5 Wave A – Investors remain bullish, convinced of an easy buying opportunity. 3 B Wave 5 Wave A Wave 4 Wave B Wave C 1 Wave 3 4 A Wave B – Bullish investors are convinced the market is moving to new highs. Wave 2 C Wave 1 Wave C – Investors highly discouraged, stops below Wave B lows are triggered. 2

Label The Corrective Waves

Label The Corrective Waves

Corrective Waves Corrective waves possess a 3-Wave (ABC) structure that retraces a % of a prior move Corrective waves trend in the opposite direction as the wave of 1 larger degree. b a Labeled with letters. c Waves 2 – 4 – B are corrective waves. 2 – 4 - B

Corrective Waves 5 3 B 1 4 A C 2 Uptrend Downtrend

Variations of Corrective Waves B Zig-Zag

Zig-Zag Corrections B A C (2) or (B) 1. 3-Wave (ABC) structure ii iv a 2. Counts as 5-3-5 ii i 3. Often found in W.2 or W.B b iii i B-wave retraces less than 78.6% of A The end of W.C is considerably lower than the start of W.A iv v A iii v C (2) or (B)

Zig Zag Wave A is often equal to Wave C in terms of price distance traveled

Zig-Zag Corrections Wave A is often equal to Wave C in terms of price distance traveled

Trading ZigZags - Retracment

Trading ZigZags - Projection

Trading ZigZags - Extension

Trading ZigZags - Entries

Trading ZigZags – 1st Take Profit

Trading ZigZags – 1st Take Profit

Trading ZigZags – 2nd Take Profit

Trading ZigZags – 3rd Take Profit

Live Trade Setups Zig Zags in 2nd waves HAL 180 min – red count RIG 180 min – red count WYNN 180 min – red count

Variations of Corrective Waves B A C Flat

Flat Corrections (3) B A C (4) 3-wave pattern labeled A-B-C ii iii iv v A B C (4) (3) 3-wave pattern labeled A-B-C Subdivides 3-3-5 Often occurs in W.4 Unlike Zig-Zags, the end of W.C terminates just prior, at, or beyond the end of W.A. B-wave should retrace at least 90% of A Occurs in strongly trending markets, around an extension

Expanded Flat Corrections B (3) c W.B ends beyond W.A’s beginning b ii a W.C ends beyond W.A’ end i b Very common variation a iv Same composition as a regular flat wave c A iii v C (4)

Flat Corrections B (3) A C (4) c b ii Counts as 3-3-5 a W.B ends beyond W.A’s beginning i b a iv W.C ends beyond W.A’s end c Very common variation A iii v C (4)

FLAT CORRECTION

Lennar Wave 2 Flat

Variations of Corrective Waves B D E Triangle

Triangle Corrections (3) or (A) (5) or (C) (4) or (B) Reflects balance of forces B D Occurs prior to a final motive wave in the pattern of one larger degree, terminal move E 5 waves, all with 3-wave subdivisions, labeled A-B-C-D-E C (4) or (B) A Must retrace portion of the prior impulse wave at W.E’s end

Running Triangles (5) or (C) (3) or (A) (4) or (B) B W.B exceeds W.A’s beginning D Advance to new high in W.B often ‘fakes’ traders out E C (4) or (B) Very common variation A

Running Triangles

Running Triangles

Live Analysis S&P 500 Triangle – Trading tactics XLY – Live Trade setup in trade desk TLT – live trade setup in trade desk XLV – Closed trade setup in trade desk from March

Beware the Triangle-B Trap

Beware the Triangle-B Trap

Beware the Triangle-B Trap

Comparing Corrections vs Corrections Comparing price and time of one correction compared to another correction is one of the most powerful ways to set up your trades.

Variations of Corrective Waves X Y W Combination

X-Wave Combinations A B C (W) (X) (Y) A B C (W) (X) (Y) X W Y i ii iii iv v a b c A B C (W) (X) (Y) i ii iii iv v a b c A B C (W) (X) (Y) Instead of an A-B-C pattern, combinations take on an W-X-Y pattern X X waves are typically a Zig-Zag pattern W & Y waves are either Zig-Zags, Flats or Triangles W Combinations typically have a side-ways appearance Y

Double Zig-Zag Combo B (X) A C (W) (Y) i ii iii iv v a b c A Double Zig-Zag joined by a X wave which is also a Zig-Zag This would be a very deep correction compared to other combinations

What combo is this? ii iii a b c i iv v

What combo is this? B ? B ii iii a b c i iv v D E C A A C

What combo is this? B (X) B ii iii a b c i iv v D E C A A C

What combo is this? ii iii a b c i iv v A B C D E (W) (X) 4 (Y)

Flat Triangle Combo Flat Wave Triangle (X) (Y) (W) Flat Waves are common in the W wave position Triangles are common in the Y wave position This combination looks more sideways than directional

What combo is this? ii iii a b c i iv v

What combo is this? ii iii a b c i iv v A B C (X)

What combo is this? ii iii a b c i iv v A B C (X) (Y) (W)

Flat Zig-Zag Combo Flat Wave (X) Zig-Zag (W) (Y)

Labeled W-Y-Z (W-X-Y-X-Z). Rare. What’s this? Zig-Zag (X) (X) Flat Triangle (W) (Z) (Y) Triple combinations are three corrective patterns joined by two X waves. Labeled W-Y-Z (W-X-Y-X-Z). Rare.

Labeled W-Y-Z (W-X-Y-X-Z). Rare. Triple Combination Zig-Zag (X) (X) Flat Triangle (W) (Z) (Y) Triple combinations are three corrective patterns joined by two X waves. Labeled W-Y-Z (W-X-Y-X-Z). Rare.