5/10/2016 - NEoWave Staff
Details on Glenn Neely's NEW top-down trading strategy
Editor's note: This week, Glenn Neely shared the following note - his "eureka moment" - with NEoWave subscribers. We're sharing it here, on the NEoWave blog, since this discussion of "top-down" Elliott Wave analysis and "top-down" trading strategy is useful for anyone who follows, analyzes, and trades the stock market. Here is Mr. Neely's note:
It was 1982 when I first read the phrase “Elliott Wave theory.” After 5 years of massive effort (reading everything I could find on the subject, applying the theory to real-time charts and trying to trade based on that information), I finally realized accurate Wave analysis was dependent on a top-down approach.
“Top-down” Wave analysis is when you begin the labeling process on the largest time frame first. Only after structure on that time frame is clear, and it follows all the rules, do you attempt to decipher smaller time frames. In addition, you must “migrate” larger Wave structure to smaller charts before you begin more detailed Wave analysis. This creates a logical, cohesive connection between the implications of all time frames and is a process that has served my Wave analysis well for decades.
Unfortunately, earlier this year, it dawned on me I was not applying this same top-down approach to Neely River trading strategies. That was my “eureka” moment; it immediately clarified why trading has been so difficult the last 6-12 months or more.
A top-down trading strategy (one that starts with the largest time frame first) is likely to yield many benefits. First, by starting with a 1/3 position on monthly charts, if that trade doesn’t work out, we only lose 1/3. If weekly conditions begin to sync with monthly structure (or Neely River conditions), almost by definition, our earlier entry will be at a profit. This will enhance our ability to get risk to zero on older positions as we add new positions. A final 1/3 Short can be considered if daily charts reinforced the weekly perspective. Consequently, we are scaling in as conditions improve and earlier positions move into profit. The super-successful money manager, Paul Tudor Jones, once famously said “Losers average Losers.” In other words, it is very dangerous to add to losing positions. With our new strategy, we are doing the opposite - we are only adding as conditions reinforce our outlook.
Markets tend to behave chaotically during topping and bottoming phases and accelerate during the middle of trends. Our new top-down trading strategy will only add to positions as a market gets closer to that likely acceleration phase without risking too much during the initial topping and bottoming process.
I’m confident this new tactic will be easier to follow and will make more sense to NEoWave Trading customers. in addition, it is likely to yield better results, which will enhance confidence during trading.