How to cut losses using Elliott wave theory: a practical example

How to cut losses using Elliott wave theory? - "Cut losses; allow profits to run''. How many times have you read or heard about this? This statement is a principle maintained by professional and successful traders over the years.

AtoZ Markets - The Elliott Wave theory is getting an increasing attention more than ever. This trend is only bound to increase. The Elliott theory identifies patterns on the historical charts of a financial instrument which is well defined and can be measured. Elliott wave is not just a theory. It is a methodology. How do we use Elliott wave as a methodology especially in the area of trade management? Can you cut losses using Elliott wave theory?

You will agree with me that a good trading system/methodology should give an entry price, exit price and prospective targets. More than all these, a good methodology/system must give clues on how to manage an opened trade. How to cut losses, extend profits and even add to a winning position. A trader that understands all these is only bound to be successful in the short and long term. There are technical and methodical ways of cutting losses (i.e adjusting stop loss). No technical methods makes it as easy and well-defined as the Elliott wave theory. The following gives a practical example on EURJPY setup we shared on 17th May. We have used the following chart in our setup.

17 May EUR JPY Elliott wave analysis EURJPY Elliott wave analysis, H2 (click to zoom)

We identified the chart above as a clear impulse wave. Impulse wave patterns are often followed by at least a 3-wave correction. There was a breakout at 124 thereby giving a selling opportunity with stop loss at 125.9. There are other methods of entry like selling the pullback or use price action on a higher time frame etc. Let's assume a trader sold at breakout -124. He is risking 190 pips and probably committed 3% of his fund targeting 6% and above. What happened next? Can he cut losses using Elliott wave theory or extend his profit?

Want to trade Forex using Elliot wave theory with a regulated broker? Open a live account with AtoZ Markets approved forex brokers:


Multibank Review
Visit Site
4.8/5 Review
Visit Site
4.8/5 Review
Visit Site


How to cut losses using Elliott wave theory: EURJPY study

How to cut losses using Elliott wave theory EURJPY Elliott wave analysis, H2 (click to zoom)

Price made more dips away from the entry price giving initial small profit which is far from the targets set. From this point, we start managing our trade. We aim to cut losses using Elliott wave theory or of course maximize our profitability. Remember? Cut losses short, and the winning positions run.

Next step: Go to the lower time frame to study the sub-waves of the dip.

How to cut losses using Elliott wave theory EURJPY Elliott wave analysis, 15 min

The chart above shows the sub-wave of the dip as an impulse wave. If there won't be any extension, we can expect a 3-wave correction soon, to 50-61.8% Fib retracement of the dip. The whole setup will be invalid at 125.9 where the stop loss is set.

Next step: wait for price reaction

How to cut losses using Elliott wave theory EURJPY Elliott wave analysis,15 min

Price made a 3-wave rally slightly above the 61.8% Fibonacci retracement to 124.95. After which, price made an effort to push below with a double top. We can can tag this as the end of a-b-c to adjust stop loss to. We therefor, reduce our stop loss to this level. 190 pips has been cut to 95 pips or 3% cut to 1.5% or $100 loss cut to $50. After this we wait for price to continue downside by breaking the wave b of the correction. What happened next?


Wait for price to prove you wrong or right; don't panic!

We were stopped down at an adjusted stop loss. This is how professional traders cut losses using Elliott wave theory. The pullback does not mean that the setup is invalid. Trading is different from analysis. The objectives of a trader should be to extend profits and cut losses. We have achieved our objective. We have cut losses using Elliott wave theory

What if price continues downside, can we enter again?

How to cut losses using Elliott wave theory EURJPY Elliott wave analysis, 15 min

Though the present rally looks like a 5-wave move that will break above 125.9. A 3-wave correction still goes until price breaks above. If price breaks below, it is good to have a re-entry. Our initial setup is not invalid yet. The stop loss can be at the same initial level and target at the same level. What will be difference now is the risk allotted for the re-entry. In order to continue the 'cut losses' process, a trader can invest the fund he was able to cut successfully from the first entry i.e 1.5% or $50 in this example. You can apply the same 'cut-losses' process. Professional traders don't compound on losses, they rather cut. They only compound on profits. We will see that in another example of how Elliott wave theory can help us manage our trades. Stay tuned.

Should you trade using 'Elliot Wave Theory' on your own at all?

Before you start trading with Elliot Wave Theory, you'll want to read this.

Our in-house trading expert Dr Yury Safronau, PhD in Economic Sciences, gives you daily his best forex, metals, and cryptocurrencies to buy and sell signals right now.



His trading strategies which are based on non-linear dynamic models have achieved more than 65 000 pips of profits since 2015. And right now there are some very strong buy and sell signals across several markets you don't want to miss.

Want to see which ones?


Leave a Reply

Your email address will not be published. Required fields are marked *