Combining Elliott Wave with Technical Indicators and Oscillators: Advanced Strategies
Elliott Wave is possibly one of the most complicated and difficult technical analysis methods to master. It took me about 3 years of daily practice before I would consider my level to be expert. I have been using Elliott Wave now for (at the time of writing) 15 years, and still I occasionally come across a price movement which is difficult to analyse. This difficulty is probably why there is so much very poor quality Elliott Wave work online, some of it even from skilled analysts who charge fees for it.
To make the situation even more difficult, I have learned now as a Certified Market Technician (CMT) for over a decadethat to use Elliott Wave in isolation with no other technical analysis to support it is to leave the job half done. The probability of an Elliott Wave count considered without any reference to any other technical analysis will never approach the probability of an Elliott Wave count which has support from, or aligns with, a suitable range of technical analysis methods.
As I moved through my final year of my CMT exams I settled on a small but comprehensive range of technical oscillators and indicators to use. This article will very briefly outline what they are and why I chose them. I will from time to time use other methods, but it is a small set that you can use with great effect.
At any one point in time a market will be doing only one of two things, it will either be trending or consolidating. In order to know what state the market is in I use Average Directional Indicator (ADX). It is important to know when the market is trending as that is where profits are made. Only the most experienced of traders should try to profit in a consolidating market, as price will typically move in choppy overlapping movement from one swing to resistance and support, and may overshoot resistance or support only to move back to within the consolidation. False breakouts are common. ADX reduces the probability of entering a consolidating market and increases the probability of profiting from a trend.
ADX is also used to indicate when the trend may become extreme and be in danger of ending.
The second most important indicator is Relative Strength Indicator (RSI). RSI measures the strength of price today against its recent history (usually a 14 period average. It is important to understand RSI does not measure the strength of the market you are looking at against any other market. RSI tells you when the market is oversold or overbought. Bullish and bearish divergence are important signals.
Using ADX and RSI together can tell you when a trend change is upcoming. If both are extreme and RSI has reached extreme then exhibited divergence, a trend change may occur at that point or very soon thereafter. Used together these two indicators are very powerful.
Average True Range (ATR) is a measure of volatility. ATR generally declines during consolidations and increases during trends, particularly during a third wave. There are some important exceptions to this, such as the indicies tend to have a negative correlation with ATR, declining in bull markets and increasing in bear markets. When ATR has been declining for some time, it should be expected that ATR may show an increase soon. Greater volatility is associated with greater potential profits, but also higher risk.
Along with volume analysis, On Balance Volume (OBV) can be very powerful. OBV can be used in two ways. My preferred method is to wait for OBV to develop a range then draw resistance and support lines. A breakout from a range by OBV will sometimes precede a breakout by price from a consolidation; in this way, OBV is a leading indicator, and it is relatively reliable when it does this. The other method is to use it as a confirming indicator. If price makes new extremes, then it should be supported by OBV making corresponding extremes. When it is not, this indicates weakness in price.
These are the main technical indicators I use to support my Elliott Wave analysis. If you added only these four to your Elliott Wave analysis your accuracy in predictions should improve substantially.