A question from our friend Mary

Today, I got this e-mail from Mary:

Juan,
I am finding it difficult to identify ZigZags. Can I use the PCCRC for BUY and SELL signals given by Profit Source, with confirmation from Stochastics and also observing low IV on the long options?

Can PCCRC be used on Bollinger Band breakouts or other buy/sell signals as long as the rules for PCCRC are observed?

Regards,
Mary


Mary, I would insist that you look at many charts because pattern recognition is the basis of the Elliott wave theory. Imagine that Ralph Nelson Elliott had none of the electronic tools we have now-a-days have back in the 30’s when he first formulated his theory.

I have found over the years that pattern recognition, along with the basic rules of Elliott are essential for my trading, so using the computer without the knowledge of the basic tenets amounts to cheating: In the end you lose.

There is a lot of people trying to get your money with the promise of easy profits. Everyone has a system (even I, obviously), but how well is going to work for you, you’ll be the only judge. I bought Advanced Get after listening to the sales pitch by the Optionetics crowd during a period of great self-doubt in my trading career. Thinking that the computer would do my work for me, I soon recognized that Advanced Get was not counting waves properly. Imagine that! I spend thousands of dollars in a piece of software I could not believe in, the thing simply did not obey Elliott basic tenets!

I understand that Profit Source is very closely similar to Advanced Get (is it the next generation?). Advanced Get offers a search capability that can bring you a selection of stocks at the bottom of “wave IV”, and poised to enter a wave V rally. It even offers you a Fibonacci target for each candidate selected. Should you discard the software and buy a new one such as Refined Elliott Trader? Please don’t. That would be throwing good money after bad. Once again, you need to educate yourself on the Elliott wave so that with the proper criteria you could select among the candidates resulting from your search, regardless of the software you use to pick candidates, it is your discernment that will bring you to the right pick.

If you see what I have described in my DVD 1 is not much different than an Advanced Get Type I trade. That is, a stock following an impulse (wave III for Advanced Get, wave 1 or A for my system) and a correction (wave IV for Advanced Get, wave 2 or B for my system), and that is poised to rally. Swanelle’s RET strategy is to pick stocks in an incomplete zigzag, having finished wave B. He claims that this is the most reliable pick using his statistically tested approach. I have been trading with this approach, as my favorite trading style (post-earnings jump) has been showing slim pickings.

Ultimately, whether you use my Telechart/IQchar search, Swannelle’s zigzag scan, A.Get Type I trade, or Profit Source strategy candidate selection, you are going to have to find consistency in your trading, by obtaining your own biases. If you can identify an impulse (5 waves up), followed by a correction (3 waves down correcting the impulse), then you should expect a rally equivalent (or close to equivalent) to the impulse wave. You could expect a similar set up to the down side.

Any set up by technical means could be a potential candidate for a PCCRC trade. After all, is the most perfectly hedged option's trading strategy I have used, so even if you have acquired sufficient experience to recognize a high probability set up, there is no guarantee that you will have a winner with sufficient frequency to make consistent profits. In fact, buying calls may not be necessarily the best approach unless you take into consideration other factors such as time to expiration (Theta) or Implied Volatility (Vega). Delta gains could only result after a good rally and the set ups above are designed to anticipate rallies. Even then, you should pay close attention to Vega and Theta. This is amply covered in my DVD’s and the numerous posts and articles in this blog.

Let’s say that you decide to enter a PCCRC because you recognize that even under high probability set ups, things can (and often do) go wrong. On the other hand, a stock can go precisely in your direction in very short order, like it happened to me with AQNT, early this year. You want to put yourself in a position to profit. If you are playing calls, you would need to anticipate the move. With the PCCRC, months could pass before the move, without you losing one penny in Theta decay. So yes, the PCCRC is highly recommended in any case. But you must only enter a trade when the conditions on implied volatility necessary for a successful trade are met. Carefully study DVD 3 to understand the conditions. If you can use Profit Source to pick candidates some months (or even years) in the past, then you could use Optionetic’s platinum, to see how the PCCRC would have performed under idealized conditions.

Finally, be in the look out for a Video in which I will attempt to demonstrate the use of Advanced Get type I Trade to select Elliott candidates. You could apply the explanations in this upcoming DVD to your Profit Source Software and tell us how well they apply.

Juan