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Where the protective stop should be?

It is not difficult to get emotional about trading. And as many of you probably know, emotions are rarely helpful, when you have to make financial decisions. So, what can we do as traders, in order to protect ourselves from our own human imperfections? And the answer is one – to put our protective stop order at the right place. According to the Elliott Wave Principle, there is only one right place for a protective stop, when we are entering a trade after the standard 5-3 cycle. This place is right at the point, where the impulsive five had started. To illustrate what we are talking about, we will show you how this pattern developed in EUR/GBP from January to February 2014. On the first chart below you can see the complete cycle, after which another impulsive rally to the upside had to be expected.

protective stop 11

Another evidence that wave (2)/B is finished was the nice bounce exactly from the 61.8% Fibonacci level. So going long from 0.8220 was reasonable at the time. Now we want you to pay attention to where our protective stop is – below the start of the impulsive rise. On the second chart you will see what happened next.

protective stop 12

Prices rose, but did so in only three waves, so we moved to a new wave count, considering a possible expanding triangle in wave B. Despite the fact that EUR/GBP declined to a new bottom, our protective stop remained untouched, so once again we were bulls on this pair. On the next chart below you will see how the situation developed.

protective stop 13

Yes, a new bottom with a new wave count, carrying the same bullish message. And we were still in the trade, because our protective stop is at the right place. Now we had an 85% correction and emotions like desperation and anxiety were beginning to settle in. However, chances were still on our side and with a stop beneath the impulse, we had to stay calm. Look what happened next.

protective stop 14

EUR/GBP exploded to a new high, above the top of the previous impulsive wave. It turned out to be only a C wave, but the minimum requirements were fulfilled and our patience – rewarded. This is a good example of the Wave Principle being irritating, but if you follow its rules, you will be on the right side more often than not.

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