EWATSS® Elliott Wave Analysis and Trade Selection Trading System
1. Stop Loss is important to:-
a. define risk at the start of a trade
b. reduce risk during the progress of a trade
c. protect profit on maturity of a trade
d. limit loss in case of catastrophic events even when trader is away from his trading platform (on his smartphone / tablet / PC).
2. Stop Loss should be placed at the nearest level which is not easily likely to be breached.
3. In Elliott Wave Theory terms, Stop Loss should be placed at a level breach of which would invalidate the current Wave Count on the basis of which you entered the trade.
4. For example, while entering at the beginning of a new trend at end of Wave 2 or start of Wave 3, Stop Loss can be 1 tick/pip/paisa below the beginning point of Wave 1 - since Wave 2 can never go beyond the beginning point of Wave 1 as per Elliott Wave Theory Rule;
5. As another example, while trend is established in Wave 3, Stop Loss can be 1 tick/pip/paisa below the ending point of Wave 1 - since Wave 4 can never go into the territory of Wave 1 as per Elliott Wave Theory Rule.
6. As another example, when Wave 4 has ended and Wave 5 has near about started, Stop Loss can be 1 tick/pip/paisa below the lowest point touched in Wave 4 - since Sub Wave 2 of Wave 5 can never go into the territory of Sub Wave 1 of Wave 5 (Sub Wave 1 of Wave 5 starts from the lowest point touched in Wave 4) as per Elliott Wave Theory Rule.
7. Such Rules also apply at the sub-wave / component-wave levels and can be used to trail the Stop Loss levels during the progress of a trade.
Best wishes.
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