I just ran into a trade that was so textbox, I had to take a picture of it... in the form of multiple charts.
After a run up and a fresh "false bar" long, we see a quick higher high with some divergence in the stochastic and the osc (see red lines on chart). This isn't a trade setup, but merely a heads up to be prepared for the trade setup in the direction of the trend.
We want it to pullback in order to give us a chance to get long. Based on how far the previous wave pulled back (left arrow), we estimate where we will enter (if other indicators come together at the same time!). I personally see 1.272 pullbacks a lot, so this is the first place I look. You can see below we hit that line (to the tick!) right as the stochastic setup for us.
The target for this move is based on the first wave of this move (left arrow). In this case I would definitely start looking to take profits as we hit the 1.0 level (903.25). Especially, since the MOB comes in right in this area, as well. The ultimate target would be the 1.272 level (904.75). (Or higher, if you want to keep a runner.)
However, taking a look at the indicators, we see a new false bar, a higher high, and the oscillator having a bit of divergence. So, rather, I would get out completely here and wait for a new setup. If you are a firm Elliot Wave analyst, another way to look at it is that this "wave 5" should contain 5 sub-waves. So far, Wave 5 was pretty much a straight shot. This means, we could see a lot more upside in this move.
I used to be a big fan of Elliot Wave analysis, however, I didn't find it very reliable to trade off of. However, I do notice the structure sometimes form beautifully, which gives me a bit more confidence in particular trades. In this example (this is the same price action in the above charts), I labeled what I see in this series of waves. When I want to estimate where "Wave 4" will end, I typically look for it to be 1.272 of "Wave 2". For estimating "Wave 5", I look at a 1.0 to 1.272 fib extension of "Wave 1". Of course, relying on other indicators as confirmation, such as the oscillator and the stochastic. It's better to be on the sidelines wanting to be in, than to be in a losing trade and wanting to be out!
Usually, the structure won't be as clear as this one. However, in this example, you can clearly count the 5 sub-waves of "Wave 3"!
You can see the fib extensions working well, even in these small sub-waves. Below you can see how taking a fib extension of "sub-Wave 1" (left arrow) gives us the size of "sub-Wave 5" (right arrow). It went right to the 1.272 extension! Simiarly, you could do the same thing with "sub-wave 2" and "sub-wave 4". However, these little moves are too small (and risky) to trade. But when you see everything forming as you'd expect, it makes you have all the more confidence in the "larger picture" trade (the one initially mentioned above).
Good hunting traders!
Lesson