As a rule, you should never give up on a trade, if it still has the potential to develop in your favor. But how to determine, if a trade is no longer valid? Fundamental market analysis does not provide such information at all. Conventional technical analysis rarely gives you a concrete level for the protective stop. Only the Elliott Wave Principle comes with a specific invalidation level attached to each trade setup. This is extremely important, because traders must get out of a loser as soon as they can, which is impossible, if they do not know, when they are wrong. The Wave Principle will tell you, when you are mistaken. For example, Ralph Nelson Elliott discovered, that second waves, which follow a five-wave impulse, cannot travel beyond the starting point of that impulse. In other words, we may see a second wave retracing 99% of wave one and that is fine. This means the invalidation level is at the point where wave two retraces 100% or more. In one of our previous lessons, called “Where The Protective Stop Should Be?”, we gave you an example of a very deep correction in EURGBP. Now we will do the same with palladium’s recent development.
Almost a month ago, on December 18th, we published an intraday forecast of palladium. Its chart, shown above, made visible a very clear five-wave decline. According to the theory, we were expecting a three-wave recovery and more weakness after it. Those, who have been following this precious metal, know that things did not go exactly as the forecast suggested, because the a-b-c correction rose much higher than expected. In fact, it wiped out almost the entire impulsive decline.
95% corrections such as this one, can easily ruin a potentially profitable trade setup, because the deeper it goes against you, the more discouraged you get. That is where the Elliott Wave Principle will help you by simply telling you that as long as the invalidation level holds, chances are still in your favor. The chart below shows what palladium did next.
Prices did not touch the invalidation level and the forecast survived. Then palladium went down from $820 to $765 so far, thus turning the almost-written-off trade into a winner.
The forecast could have been invalidated, of course. A 100% accurate forecasting method does not exist. The point is that you would know it and get out right there and then, instead of waiting, hoping, praying and wondering if it will ever reverse. This allows you to accept failure, keep your mental composure and move on to your next trade. Because, as Jeffrey Kennedy says, “there will be another one tomorrow, next week and next month… I promise”.