Determining trend and consolidation through wave cycles.

١١ مايو ٢٠٢٣

GOLD1!
In past, we have discussed how to know the quality of a trend and how to know a chart pattern's extrinsic nature according to the market phase.
If you haven't read that then I want you to read that before to have a better understanding of this idea.

Let's get started!!
How to determine the trend or consolidation through the wave cycles and degrees.

The trend moves in 3 different wave degrees:- For example, think of it like a multi-timeframe analysis.
1. Higher wave cycle (HWC) - This is a 1-month time frame trend.
2. Medium wave cycle (MWC) - This is a 1-day time frame trend.
3. Lower wave cycle (LWC) - This is 30 min time frame trend.

So Without knowing which wave cycle is being traded one can encounter these problems:-
1. Inability to select consistent breakout levels.
2. Inability to select effective stop loss levels.
3. Inability to apply effective stop sizing.
4. Inability to distinguish between trend and consolidation mode.
5. Inability to determine the direction of the predominant trend.

How can we eliminate these complications?
1. Consolidation and Trend Action in Terms of Wave Cycles and Degrees.

A market may be both in trend and consolidation modes at the same time, depending on the wave cycle being observed.

2. We may also define breakouts via the degree of the wave cycles.

Different degrees of waves help in determining whether a breakout will gonna be valid or not as a range formation near the higher wave cycle resistance zone will likely fail.
In the above figure:-
we have breakouts based on waves of lower, medium, and higher degrees. In other words, the breakout level will depend on the wave degree being traded. Being aware of the wave degree being traded will allow the trader to size the stop-loss effectively, according to the average wave amplitude and volatility associated with that particular wave degree.

3. Significance of higher wave degree reversals

When big market trends change direction, it affects smaller trends as well. This is because all the smaller trends are part of the bigger trend. So, when the big trend changes, the smaller trends also change in the same direction. This is important to understand because it means that when you see a change in a big trend, it's a sign that many smaller trends are also changing. However, smaller trends changing doesn't necessarily mean the big trend will change too.

Conclusion:- Always know which wave cycle you are trading and at what point you stand in that wave cycle.

Note: In upcoming Ideas, we will cover how Waves are used in the Elliott Wave concept.

I hope this short idea on trend or consolidation determination has added some knowledge and helped in improving your trading.
please like and comment with your views on this idea.

Keep learning,
Happy trading.

Thank you for reading.