Let's examine this chart.
Bill Williams count the Elliot wave based on AO not on Price, so we know that the peak at point Z is wave 3, and then the AO went beyond zero which is the minimum requirement of wave 4 then it goes up again until it peaks at point X. Notice here, the AO at point Z is higher than point X but the price goes higher, this is called a Divergence between price and AO. Whenever there's a divergence, it's a wave 5.
So we know there's wave 3, 4 and 5 up, then the question, is this the end of a trend?
Bill Williams use what he calls, 5 magic bullet. When all 5 magic bullets presence, most of the time it will kill a trend. Now let's look what are this 5 magic bullet (in no particular order, all 5 need to be there) and look if it appears on this chart.
1. Divergence between AO and price
2. Fractal up/down
3. Squat bar/Bearish divergence bar (BDB)
4. Price in the target zone (use Fibonacci expansion, draw from the bottom of wave 1 to the top of wave 3, most of the time a trend will end between 62-100 % fib expansion)
5. Momentum change (AO from green to red or from red to green)
If you look at the chart, all 5 magic bullets presence
So from there we know that it's the end of a trend.Then we can be confidence to enter a trade
1. Wiseman 1, Sell one tick below bdb low at 1.0230 (for aggressive trader)
2. Then add Wiseman 2 (Three consecutive AO of the same color) Sell at 1.0180 (aggressive trader)
3. Add Wiseman 3, break down fractal, Sell at 1.0183
4. Add Wiseman 3 again, break down fractal, Sell at 1.0172
5. Add Wiseman 3 again, break down fractal, Sell at 1.0154
Then there's a bullish divergent bar (6) with AO divergence, Close all position at 1.0057
1. profit 173 pips (reverse pyramid 173 pips)
2. profit 123 pips (reverse pyramid 615 pips)
3. profit 126 pips (reverse pyramid 504 pips)
4. profit 115 pips (reverse pyramid 345 pips)
5. loss 3 pips (reverse pyramid 6 pips
a total profit of 534 or a total profit of 1631 if using reverse pyramid method.
The other way to trade this is using his earlier method, wait for a saddle point then start to enter when it breaks fractal no 4, a trend following method but if you're an aggressive trader you can use the 2nd edition method, wiseman 1, 2 (counter-trend) and wiseman 3 (trend following).
If you use the green or red line stop, u'll still be in the market. The choice is yours.. :)
I tend to be careful and tighten up my stop loss if i look a divergence in AO and price..
For a better picture of this method, I strongly recommend you all to read all of his book, trading chaos, new trading dimension and trading chaos 2nd edition. Good luck and Happy Trading :D
