How to buy the dip after wave 1

What it is and when it applies

This page helps you decide whether to buy the pullback after a first wave up, and whether to add on the breakout above that wave's high, or to pass. The wave 1 high, the pullback zone and the stop are written before the first order, and the add is part of that plan with the total planned loss fixed in advance.

This is a discretionary wave approach. In Elliott Wave terms, price has made a first wave up, is pulling back in wave 2, and a close above the wave 1 high would mark wave 3 under way. A count is a judgment, and two careful traders can label the same chart differently. The stop sits at a price, below the start of wave 1, and the idea is wrong there however the move is labelled.

The belief behind the trade is that buying a pullback gets a better price than buying the first leg, and that a close above the first high is a reason to add. That is a story, not a promise. The "pullback" can be the start of a lower move, and the breakout can fail. This page cites no test of how often a first wave is followed by a third.

It fits a chart that has just made a clean first leg and is pulling back toward a zone you can mark. It does not fit a messy chart or a pullback that already traded below the start.

Before you enter

By the first of the three rules on the Elliott Wave page, wave 2 does not retrace past the start of wave 1, so any trade below that start means the count is wrong. This page exits by hand on a close below the start, and the stop order sits a buffer further down as the backstop. A wick that dips below the start and closes back above leaves the count formally broken and the trade open, so write before entry whether you leave at once instead. 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.

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: one planned loss in cash, 1-2% of equity or lower, for the whole plan: every rung and the add.
• Entry prices: the assumed fills, the pullback rungs and the add's limit price.
• Stop price: the wave 1 start minus the buffer.
• Cost allowance: a per-unit amount for fees and slippage, added to each 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 plan's full-fill value over account equity, 3 or less.
• Liquidation distance: the ticket's estimated liquidation price, below the stop for a long, read for the full-fill size. If the gap is not wide, lower the leverage setting.

The sum is the one from laddering entries: total units = planned loss / (weighted average entry minus stop, plus allowance), rounded down. Check it rung by rung, add included. The total is the planned loss if every order fills and 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, wave 1 from 100 to 112 and ATR(14) of 4. The buffer is 2, so the stop is 98. Rungs of 3 units at 106 and at 105 lose 3 x 8.3 and 3 x 7.3, which is 46.8. An add at 113 is 15.3 from the stop with the allowance, and 100 - 46.8 leaves room for 3 units, 45.9. The plan's planned loss with costs is 92.7, and it holds 9 units worth 972, or 0.10 of the account. R is measured against that 92.7. With only the rungs filled, a stop-out is 46.8, about 0.50R.

Conditions

Each of these must be checkable on the chart.

• Wave 1 reads as five swings by a swing rule you fixed. That subdivision is a guideline on the Elliott Wave page, not one of its three rules, and this page uses it as a filter. A wave 1 whose legs overlap, such as a leading diagonal, is a separate structure, so pass. Its start and high are written as dated prices once price has turned away from the high by your rule, and before any rung is placed.
• The pullback zone is written as two prices above the wave 1 start before the first rung is placed. One optional way to draw it is Fibonacci lines on wave 1: in the example, 0.5 sits at 106.0 and 0.618 at 104.6. The lines are a drawing convention, and a pullback can end above, inside or below them, down to the start (Fibonacci retracement covers drawing and anchors).
• Price has not traded below the wave 1 start.
• A second count is written, with what it does to the plan. If it reads the advance as the first leg of a correction, it reads a break above the high differently: drop the add, or pass.
• There is room: the reward to the first resistance above, 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.
• The full-plan planned loss fits the caps in portfolio risk from the first order, because every rung can fill.

Reasons to pass

Passing is a valid result. Pass when:

• wave 1 does not read as five swings, or its start, high or zone were redrawn after a rung was placed
• price has traded below the wave 1 start
• no rung fills inside the window (assume 20 candles after the wave 1 high is confirmed), or a candle closes above that high first
• the stop is so far below the zone that the plan's units fall below the exchange minimum, or costs come to more than one fifth of the planned loss
• the reward fails your written test, or a resistance band sits just above the wave 1 high
• the book near the zone is thin enough that your own order would move it

Entry

Entry on the pullback

The trigger is price trading down into the zone. Rest limit orders at the prices you wrote, sized as the plan says. The stop is a reduce-only stop-market sell at the wave 1 start minus the buffer, sized to the filled quantity and resized as each rung fills (order types explains reduce-only).

Add on the wave 3 breakout

The trigger is a decision-timeframe candle that closes above the wave 1 high, with at least one rung filled and no trade below the wave 1 start. A wick above the high does not count. Then place a limit buy for the written 3 units at the price in the sizing sum, 113. It expires after 3 candles (assumed). If price runs away without filling it, the add is skipped, so no add fills at a worse price than the sum assumed. Whichever rungs filled, the add stays at 3 units, so the plan's planned loss never passes 92.7. An unfilled rung's capacity does not become add capacity.

Execution assumptions

Assume limit orders that fill at their price, 0.3 per unit for fees and slippage, and a stop-market that fills at the next available price. If price breaks out with no rung filled, there is no add and no chase. Cancel every unfilled order when the plan ends, including when the stop fires.

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 once wave 1 has run from 100 to 112: zone 104.6 to 106, rungs of 3 units at 106 and 105, a stop at 98, and an add of 3 units at 113 after a close above 112. The planned loss with costs is 92.7. With the first resistance at 126, the reward after costs is 159.3 against 92.7, about 1:1.7 if every unit closes there.

Now change one fact. Price pulls back only to 108, never touching a rung, and the next candle closes at 113. No rung is filled, so there is no position and no add, and the close above the high lapses the rungs. The pass is logged with its reason. The outcome was chosen to show the add belonging to a position the plan already holds.

Exits

Stop. Keep the reduce-only stop at the wave 1 start minus the buffer. Any trade below the start breaks the count. A decision-timeframe close below it is this page's exit: close by hand and cancel any unfilled orders. The order is the backstop (stop-loss placement). After a wick below the start that closes back above, follow the choice you wrote before entry.

Taking profit. The first target is the next resistance above, found by looking left and marked before entry. A Fibonacci extension from wave 1 is one optional place to check. Close part there 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, the stop can move to your average entry or just below the latest higher low. It only moves toward price. Moving it lowers the modelled loss and does not free budget for more units.

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.

Ending early. Write before entry whether a close back under the wave 1 high after the add ends the whole position, only the add, or nothing.

Common pitfalls

• Sizing each rung or the add as its own trade. The plan's total is the number you chose. Size once, from the average entry.
• Deciding the add when it triggers. Write it into the sum first.
• Moving the stop down to survive a deeper pullback. The wave 1 start is where the count ends, and the stop never moves away from price.
• Redrawing the wave 1 start. A start moved after a trade beneath it can never say the idea is wrong.

What this cannot tell you

• Whether the first wave is wave 1 or a bounce. The same swings can be the first leg of a correction.
• Where the pullback ends. No line says so, and a pullback can reach the stop without a rung ever being a good price.
• Whether the breakout holds. The close above the wave 1 high is one observation at one moment.

Questions

Does wave 2 always retrace to the 0.618 line?

No. The only hard rule is that wave 2 does not pass the wave 1 start. The lines are a drawing convention, and this page cites no test that pullbacks end at them.

What if price never pulls back?

Then there is no entry, and the plan lapses.