What it is and when it applies
This page helps you decide whether to short a five-wave advance that looks finished, or to pass. The short has two ways in: an early entry when a completion signal you wrote down appears, and a later one on the first bounce that fails. Both keep the stop above the top.
This is a discretionary wave approach. In Elliott Wave terms the chart shows waves 1 to 5 rising, and you are shorting the fifth. A count is a judgment, and two careful traders can label the same chart differently. The stop below is a price, and the idea is wrong there whether or not the count is.
The belief behind the trade is that a fifth wave is the last push of a move, so the buyers who drove it are spent and price retraces. That is a story about a pattern, not a promise. A fifth wave can extend, a "top" can be the third wave of a larger count, and a truncated fifth can end below the wave 3 high. This page cites no test of how often a finished count is followed by a fall.
It fits a coin that rose in countable swings and now stalls at a marked resistance band. It does not fit a vertical run with no pullbacks, or a chart where you cannot name the start of wave 1.
Before you enter
The short is wrong if a candle closes above the top, the highest high of the fifth wave through the completion signal. The move has then not finished, or the count is wrong. The top is frozen at the signal close, and you size from it after that. The stop order goes at the top plus a buffer. The examples assume a buffer of 0.5 x ATR(14), an assumed example and not a rule. A wider buffer takes a bigger move to reach and shrinks the position, and a tighter one does the reverse. Stop-loss placement explains the level, the close and the order.
Both entries use this one stop. The bounce high sits closer, but it is inside the structure, where a second bounce can reach it while the idea is alive.
This manual's house constraints are a planned loss of 1-2% of the account per trade and a 3x maximum leverage. They are choices, not a recommended allocation, and less, or no position, is always allowed. Sizing inputs:
- Account risk: the planned loss in cash, 1-2% of equity or lower.
- Entry price: the assumed fill, near the signal close or the failed bounce's close.
- Stop price: the top plus the buffer.
- Cost allowance: a per-unit amount for fees and slippage, added to the stop distance, plus funding for the planned hold. The examples assume 0.3 per unit, an illustrative figure (trading costs and liquidity covers it).
- Leverage cap: the leverage setting, and all open position values plus this one over account equity, 3 or less.
- Liquidation distance: the ticket's estimated liquidation price, above the stop for a short. If the gap is not wide, lower the leverage setting.
Units = planned loss / (stop minus entry, plus allowance), rounded down (position sizing has the sum). Units x (distance + allowance) is the planned loss if the stop fills at its price. A gap, slippage or funding can make the realised loss larger.
For arithmetic only, assume a 10,000 account, a planned loss of 1%, or 100, a top of 150 and ATR(14) of 4. The buffer is 2, so the stop is 152. An early entry at 143 is 9 away, 9.3 with the allowance: 100 / 9.3 is about 10.75, so 10 units, worth 1,430, or 0.14 of the account. The planned loss with costs is 10 x 9.3 = 93.0. A later entry at 139 is 13 away, 13.3 with the allowance: 7 units, worth 973, with a planned loss of 93.1.
Conditions
Each of these must be checkable on the chart.
- The count is written before the signal: its degree, the start of wave 1, and the prices of waves 1, 3, 4 and the fifth wave's high so far. It passes the three rules on the Elliott Wave page: wave 2 stays above the start of wave 1, wave 3 is not the shortest of waves 1, 3 and 5, and wave 4 stays out of wave 1's range. If wave 4 overlaps wave 1, the impulse count fails rule 3. A wedge whose legs overlap belongs on the ending diagonal breakdown page, and any other overlap means relabel or pass.
- The guidelines are not required. A long wave 3, alternation between waves 2 and 4 and Fibonacci proportions are tendencies. A missing guideline never makes a count wrong, and a broken rule always does.
- A second count is written, with what it does to the plan. If it says the advance is unfinished, such as price still in wave 3 or an extended fifth, pass. If it only disagrees about where the fifth ends, use the later variant.
- The top is inside a resistance band marked and dated before the top, or within a distance you fixed below its lower edge (assume 0.5 x ATR(14)), and waves 2 and 4 are visible pullbacks.
- Optional: the RSI(14) peak on the fifth wave is below its wave 3 peak. When the fifth makes a higher high, that is regular bearish divergence as RSI divergence defines it. A truncated fifth has no higher high, so it is only a lower peak. It is never the trigger.
- There is room: the reward to the first target, after costs, passes a test you wrote before the trade. This manual sets no minimum ratio. Risk to reward gives the break-even share to compare against.
Reasons to pass
Passing is a valid result. Pass when:
- you cannot name the start of wave 1, or one of the three rules is broken
- the second count says the advance is unfinished, or you cannot write one
- the run is vertical, so there are no pullbacks to count
- the stop the top needs would shrink the position below the exchange minimum
- no completion signal, with its level L, was written before the signal candle closed
- costs come to more than one fifth of the planned loss
- the reward to the first target fails your written test
- the book near the top is thin enough that your own order would move it
Entry
Early entry on the completion signal
The signal is a decision-timeframe close beyond a level L that you write down as a price before the signal candle closes. Two examples, both your written choice: a close back inside the channel after a spike above its upper line, with L the line's value at the signal candle, or a regular bearish divergence plus a close below the last higher low, with L that low. Neither is a reliable top signal, and price can print either and keep rising.
The trigger is the signal candle's close. Place a limit order at or just above it, or a market order if getting in matters more than the fill price. It expires after 3 candles (assumed). The stop is a reduce-only stop-market buy at the top plus the buffer. A stop-limit with its limit above the trigger caps the fill price but can sit unfilled in a gap (order types explains). If price trades above the top before the order fills, cancel it.
Later entry on the first failed bounce
After the signal, price falls and bounces. Inside a window you fixed (assume 10 candles after the signal close), with no close above L since the signal, a candle trades up to within a distance you fixed of L (assume 0.5 x ATR(14)), or through it, and closes back below L. Short near that close. The stop stays at the top plus the buffer, so the entry is lower, the distance longer and the position smaller. Cancel when the window ends, a candle closes above L or price trades above the top.
Execution assumptions
Assume a limit order that fills at its price, the 0.3 allowance above, and a stop-market that fills at the next available price. If price falls away without a fill, do not chase, because the stop does not move and the reward shrinks.
Hypothetical walkthrough
Hypothetical walkthrough. Invented prices and an invented outcome, chosen to teach the decision. Not a recorded trade, and not evidence of how often this setup works.
The reader writes the plan before the signal: the count, the fifth wave's high so far at 150, the last higher low L at 144, the stop at 152, the first target at the wave 4 low, 130. A 4-hour close at 143 gives the early entry: 10 units, a planned loss with costs of 93.0, and a reward after costs of 12.7 against 9.3, about 1:1.4 if every unit closes there.
Now take the later variant. Price falls to 132, then a candle trades up to 142.5 and closes at 139, back under L. The entry is 139, 7 units, and the reward after costs is 8.7 against 13.3, about 1:0.65. The reader's own test, written beforehand and not a rule of this manual, says pass if the reward after costs is smaller than the risk after costs. The pass is logged with its reason. The outcome was chosen to show a confirmed failed bounce that still leaves too little room.
Exits
Stop. Keep the reduce-only stop at the top plus the buffer. A decision-timeframe close above the top means the idea is wrong: close by hand and cancel any unfilled orders. The order is the backstop (stop-loss placement).
Taking profit. The first target is the wave 4 low or the next support band, marked before entry. A Fibonacci retracement of the whole move is one optional way to find candidates. Close part at the first target and write the rest of the plan before the order (taking profit covers partial exits and the R arithmetic). After a partial, resize the stop to the units left.
Moving the stop. After the first target fills, move the stop to entry or just above the latest lower high. It only moves toward price.
Trailing the rest. With no fixed target, the Chandelier Exit trend ride can take over once its line passes the first stop in your favour, never before. Switch it on before entry, and leave it off in a range or when you cannot watch each close.
Common pitfalls
- Shorting before the signal. The count says "fifth wave", and price can keep climbing. Wait for the signal you wrote.
- Putting the stop at the bounce high. It sits inside the structure. Keep it at the top plus the buffer and take the smaller position.
- Re-entering without a new plan. A second short after a stop-out needs its own count, stop and size.
What this cannot tell you
- Whether the fifth wave is finished. The signal is a close beyond a level, and price can print it and carry on.
- Which of two valid counts is right. Careful traders disagree, and this page cites no test of counts against chance.
- How far price falls. The wave 4 low is a reference, and a level can fail.
Questions
Can the fifth wave end below the wave 3 high?
Yes. The rules allow a truncation, so this page does not wait for a new high before the signal.
What if another trader counts the chart differently?
Write both counts and what each does to the plan. If the other says the advance is unfinished, pass.