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c06 JWBK182-McDowell April 25, 2008 15:54 Printer: Yet to come
Entry Rules and Your Trading System 53FIGURE 6.5 TheARTSoftware Identifies a Market Breaking Out of a Consolida-
tion
Source:eSignal. http://www.eSignal.comby the MP, minor pyramid trading point triangles, facing “up,” which
indicates only acorrectionin the trend,nota change in trend yet.)In addition to these four cycles, many traders also use Elliott wave
theory to determinewaves,which are also an indication of market cycles.
There are five waves, and each has its own relevance in determining your
trading strategy. Using Elliott waves is an advanced technique and requires
that you have a thorough understanding and ability to correctly determine
which wave your market is in.
Incorrectly identifying a market cycle—with either the four major cy-
cles we’ve listed or by using Elliott wave theory—can be a costly situa-
tion. For example, if you incorrectly determined that a market entered
a new trend, but in fact it was consolidating, you might enter a trend
trade and immediately get stopped out. For this reason, market expe-
rience is the best teacher. Your best plan of action is constant ob-
servation. With that, you will continually improve your ability to read
market cycles.