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Here is my Elliott Wave chart of the last 2 days action on the Dow.

I bought near the bottom today and am holding that long overnight. I was called "brave" in the chat area for this trade - especially as everything including the EUR.USD was heading rapidly south, but from an EW perspective it was simply a case of understanding what was happening, following the EW rules, setting an appropriate stop and of course hoping I was right!

For anyone who is not familiar with EW, here are some basic rules and guidelines:

Rules:

1. Wave 2 cannot retrace beyond the start of wave 1

2. Triangles will only occur in waves 4 or B

Guidelines:

Wave 2 will often retrace almost the whole of the wave 1

Wave 3 will often extend. Wave 3 is usually an extremely powerful move, much more so than wave 1 and will defy divergence and oversold/overbought (depending on direction) indicators to keep going

Firstly there was a clear 5 wave move up yesterday to form a possible bigger wave 1 (shown in red). Note the smaller wave 2 (shown in black) retraces very deeply into the territory of wave 1 as per the guidelines.

The sell off this morning (marked B) had a triangle half way down (triangles must be in either wave 4 or B). Therefore there was a good probability that we were seeing the wave 2 correction (shown in red) and about to see the start of wave 3 upwards.

Taking the trade was simple, buy as low as possible but above 12310 (the start of wave 1). The stop would be placed just below 12310 (wave 2 cannot retrace below the start of wave 1) and going below 12310 would invalidate the setup. This gave a low risk (approx 20 pips) opportunity to take a long position where the upside should be at least 300 pips. The minimum 300 pips is based on a final 5 wave move up.

Lastly it looks like we have a bull flag at the end of the day finishing with CCI oversold at -200 plus divergence on RSI which encourages me that we will see more upside to come.

I hope this brief article might encourage some fellow traders to take a look at Elliott Wave and understand how it can give low risk entries with a high risk-reward ratio.