Key points covered in this podcast
- Why Elliott Wave is a viable approach for traders
- The importance of understanding the behaviour of institutional traders
- Swing trading vs day trading: The differences to know
When you look at the tools used by traders who demonstrate strong risk management, Elliott Wave is often a common denominator.
Paul Bratby is founder of TradeTheFifth.com, an Elliot Wave trading program and community that helps traders learn how to ride the fifth wave setup. In Introduction to Elliot Wave Theory, the latest instalment of our DailyFX podcast Trading Global Markets Decoded, our host Tyler Yell talks to Paul about using Elliott Wave analysis, how this military man turned professional trader, and his thoughts on the markets in 2019.
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Elliott Wave Theory posits that trends in prices result from investors’ predominant psychology. Why is Elliott Wave analysis such a viable tool for traders just now? ‘It’s a simple and repeatable solution to measuring trends and key to understanding where any market is at any particular moment in time,’ Paul says. ‘Understanding this on multiple timeframes builds confidence in trading those different timeframes.’
It’s also useful for understanding the herd mentality and behaviour of institutional traders. ‘As retail traders we don’t move markets. Even a thousand of us pressing ‘buy’ on a stock doesn’t move markets. So we need to understand that herd mentality of institutional traders [the ones who do].’
Paul’s trading journey began part-time during a career in the Army. He became interested in forex and found that many skills key for the military were also useful for trading.
‘I understood early that discipline is key; as well as compartmentalizing and showing a keen eye for detail. These traits allowed me to keep to a strategy and keep emotions out of the equation.’
He compares sticking to a trading strategy to assembling and disassembling a rifle in the military. ‘There’s a procedure you go through to take it apart and put it together again, and you repeat it. That simple, repeatable procedure is similar to successful trading.’
Trading in 2019 using Elliott Wave Analysis
What does he anticipate in 2019’s trading environment? ‘I see markets recovering in 2019. [Fed] interest rate hikes have happened, and are looking like slowing. When we look at some of the bigger stocks on weekly timeframes, they’ve all mostly had a wave four pullback and that’s what we look for.
‘As far as stocks are concerned, if this support can hold and we can move away we’re in for a really good run.’
Paul says that more and more institutional traders now, while still using support and resistance zones and moving averages, will use Elliott wave indicator trading software and make measurements on a daily timeframe.
‘Understanding what these institutional traders do and what they’re using will help us with our trading,’ he reaffirms.
When it comes to fundamental analysis, Paul often looks to earnings reports as a useful barometer for price action. ‘For stocks, you can go back over a year or so and see reaction to a specific earnings report, and where it was in that Elliott Wave count.
‘If it’s in a really strong trend, and we’ve just had a pullback and the last three earnings have been pretty good, there’s a good chance [if you get a good earnings report] you’re going to go on and make a new high.’
When setting up a trade based on reactions to earnings, Paul discusses going long after the resistance zone, when it’s pushed through. ‘If it doesn’t [rise], and it bounces off and comes back down again and the earnings are poor, we can look for potential short trades. So it’s about understanding that news cycle.’
Swing Trading vs Day Trading
Swing trading and day trading require different approaches. Paul started as a swing trader, looking to trade stocks on a daily timeframe and setting them up to swing for around 20 days during the fifth wave move.
‘It’s a great part-time trading strategy; you just need to see how each stock has performed each day, the open, the close, the high, the low; that’s it. Then you can put your orders on and adjust your stock, ready for the next session,’ he says.
Today, it’s still his core trading strategy because it’s relatively stress-free. ‘You don’t have to sit at a screen and watch a stock for a whole day; you can come home from work, the markets have closed, look at the high, the low, the close, do your scans, set it up for the next day, fire and forget, go to work, come back.’
Day trading, as Paul notes, is a different beast, requiring a trader to be full time and get into the trenches every day. ‘For me day trading is done in the first half of the trading session, and the markets need to be trending.’
Living in Europe, he rarely trades in the second half of the session unless he has a lot of open trades. ‘I don’t want to work till 10pm, I want to make my money, finish for dinner and spend time with my family,’ he explains.
Part-time Trading vs Full-time
Paul stresses the importance as a day trader not to just react, but have a plan, and the need to create a trading plan. ‘As a part-time trader, concentrating on those swing trades is one thing, but with day trading you’ve got to be ready to go every day.’
Account size is also key for aspiring traders. ‘If you have an account size less than $100,000, you’ll find it very difficult to do this as a full-time income.
‘A lot of people come to me and say, ‘I’ve got a $10,000 account and I’m going to trade options full time.’ It won’t work. Unless you’ve got $100,000 or more and you’re only risking 1 per cent on every single trade, you are not going to have a full time trading career straight away.’
Building experience through a demo account is critical. ‘To be able to build competence with a simple and repeatable strategy, you need to do it lots of times using a paper training account.
‘Then you can move to trading a small account balance with real money, using the same repeatable simple strategy, but this time you will gain the experience of real loss, of real trade management and risk.’
Once you have a decent account size and good experience with that core strategy, giving you consistent returns on your trading, it may be time to go full time. ‘Now you have that part time strategy down, it becomes your backbone.’
Be Sure to Check Out Paul’s Platform
TradeTheFifth.com offers an Elliot Wave trading program and community that helps traders learn how to ride the fifth wave setup. Check it out today.