Momentum Waves are a simpler and modified version of Elliot Waves, which are much easier to use. When we make these waves, we look only at the current market swings. If the current swings lend themselves to 1-2-3-4-5 or A-B-C analysis, we mark the waves on the swing points and try to identify future targets. Very often, current swings tell us nothing, and we do not try to force any wave counts.
How is it different from Elliot Waves?
Elliot Wave analysis spans an entire industry. There are enough EW rules to fill a big book. Momentum Waves are identified without much rule making. You can do it yourself, just as I do it here.
EW look at past data. Some EW experts look at 20 or 30 year data to determine where we are now. To each his own! MW look only at current data. MW users like myself follow the axiom: What is behind us is not important.
Some Simple Momentum Wave Rules:
1. Wave Zero should be the end of a trend. This is the starting point of a new trend in the opposite direction.
2. Wave 1 makes a swing high.
3. Wave 2 is a retracement going towards Wave 0, but does not go beyond wave 0. [Use some common sense. If we cross wave 0 then wave 0 was not the end of a trend.]
4. Wave 3 is the big thrust in the direction of the current trend.
5. Wave 4 is a retracement of the move from wave 2 to wave 3.
6. Finally, Wave 5, is the final thrust in the direction of the current trend.
No More Rules ! Six is more than enough ! I like trading strategies with just two rules: how to get in and how to get out.
How we can trade Momentum Waves?
1. Once we can identify wave 0, wave 1 and wave 2, we can expect a big thrust when wave 3 is made. We can take a trade in the expected direction of wave 3 with a stop just away from wave 0. This is usually a low risk trade.
2. IF we are correct and we can identify wave 3, then we are wating for a retracement that is wave 4. After a retracement, we can enter again in the direction of expected wave 5, with a stop away from wave 4.
That’s It.
The Final Rule: Sometimes you can identify these waves. Quite often you cannot. When you cannot, you cannot.
Why 5 waves, why not 7 or 9 or 11?
Sure why not? I am comfortable with 5, but you can do what you want.
What if we are wrong?
Ask your broker to refund your margin, close your account with him and set up an internet café – a low risk business.
Sorry, just joking.
When we are wrong, we get stopped out with some losses. Losses are a part of trading costs, so what is the big deal? The nice thing about MW is a fairly close stop, and the stop level is visible. When you are trying to catch wave 3, your stop is just around wave 0. When you are trying to catch wave 5, your stop is a little away from wave 4.
How did you get those Wave 4 targets?
Gann & Fibonacci.
A Practical Example:
I will put the Nifty chart again:
After a strong down move, we had projected a target of 945 for the Nifty. The Nifty made a low of 944.60, and then started moving up. When it crossed 955, we realized we may have made an important low. So 944.60 became out tentative Wave 0. We have written it as 0 944.60 – This means the wave is 0 and the level is 944.60.
After a high of 968.60, the Nifty made a sudden move down. Assuming that wave zero would hold, we forecast support at 945. The Nifty made a low of 945.15 and immediately pushed up. After one 60 minute bar closed higher, we were buyers in Nifty futures. Our stop was just below the Nifty level of 944.60. We have marked our entry point with a blue arrow. The risk was low.
The next day opened with a gap and we could enjoy the momentum of a wave three up move in our favor. Finally, the Nifty opened with a strong up gap and made a high of 982.95. Of course, we did not know then that this will be a high for wave 3. But after a strong gap open, we tightened our stop, below a 3 bar low. We were stopped out at 979 (Nifty) for a decent profit. A red arrow marks the point where we were stopped out.
Now, we saw the Nifty decline and we were expecting a wave 4 correction. The Nifty did correct, but rallied again. We entered on the rally assuming a wave 5 will begin. But on Friday, the Nifty began declining again and we were stopped out of a long trade with a profit of just 2 points.
We have not taken short positions, since we do expect a rally to wave 5 - new highs. The Nifty is close to its wave 4 targets. If we see two higher highs tomorrow, we will enter long positions again, with a stop below the low of wave 4.
