Layering Into A Position

Layering in

There have been some questions of late about an EW-based approach to layering into a position so I thought I'd draft something more comprehensive. I want to note that layering into a position is primarily intended for trading in the direction of the prevailing trend. That means we this approach is not ideally intended for "building a position" to trade countertend the end of a wave 1/3/5 no regardless of the expected size of the subsequent wave A/2/4. Instead we want to use A/2/4 particularly the c subwaves (iii) and iii of (v) and v of (v) for initiating / adding to positions. Though not intrinsically part of this write-up on "how" to layer in, I'd like to expand on what's stated above to note that "layering in" to "build a (countertrend) position" is a very nebulous endeavor that typical does not permit clear parameters for managing risk. Instead we want to layer in to positions that have defined parameters of where the thesis is incorrect. The starkest rule based version of achieving those parameters in Elliott Wave is the 1-2 setup as it completely invalidates if the origin of wave 1 is breached.

Layering in

For the purpose of simplicity in this write up I'm going to describe conditions for a long/buy trade regarding accumulating a position.

I like to think about building a position in 3 separate portions or tranches with sub-portions in those three buckets. I would call those three buckets (and also characterize them)

1) Initial (Small/Aggressive)
2) Post-Turn / Right side of the V (Large / Conservative)
3) Add-on (Variable / Aggressive)

Initial tranche(s)

These are entered ideally with preset limit orders as price is falling into the support region. If price is pulling back in what's thought to be a larger wave (2), the initial position could be in the wave (iii) of c of A of (2). Even assuming that this prospective entry within the standard Fibonacci support this entry is a bit on the aggressive side but still reasonable. Assuming that the A wave is subdividing as a 3 wave a-b-c type of move, as the move is developing we have a lot of uncertainty as to whether the move is just the A of (2) or all of (2) as a larger degree A-B-C. As such upon completion of the first C wave that occurs in Fib support, this would be the place to get a position. What's mentioned above regarding (iii) of c entails entering "early" to make sure a position is entered if the correction completes irregularly as a WXY or if the wave count is incorrect, mistaking a wave (v) for an extended 3rd. The next entry in an "Initial Position" would happen still as price is falling in wave (v) of c of A. Once again this is occurring as price is falling into support.

Should the initial three wave decline into support be all of the (2), the aforementioned entries would be ALL of the Initial Position. Should a larger bounce develop and become the B of (2), some de-risking may occur of the "Post-Turn" entries (not yet discussed) and even potentially some of the Initial positions and then this process of entry can be repeated for the C wave.

Post-Turn / Right side of the V

Often times upon completion of the C wave pattern particularly if the low of it has characteristics of capitulation and breaks through some old untested interim low, we see a swift recovery developing. In these cases, I like to enter my next set of tranches and may opt to do so as a very large apportionment of my desired position size. Why? Well, even though these entries are seldom at better prices than the Initial Position, evidence of a low in place allows for trading this new tranche entered on "the right side of V" aggressive and with a tight stop below the low, ie the vertex of the V. So while this tranche may  generate less profit per share than the Initial Position(s), it offers substantially better risk / reward considering a tighter invalidation. The real risk or challenge with this tranche is the prospect of multiple papercuts. In an Elliott Wave context, what's needed to do this well is evidence of a low in place via 

a) complete downside pattern
b) impulsive recovery
c) take out of initial resistance needed to hold for likely continuation to the downside.

Those elements being satisfied gives us much better odds of a low in place which can potentially be called very early, thereby allowing sizable entries with very tight stops

Add-on

After getting an initial position at the lows of a wave (2) and adding some size post-turn, the next set of entries to focus on are the "Add-on(s)" These may occur in the wave 2 of (3) position after a good impulse for the wave 1 of (3). And one could follow the same steps as mentioned above to apportion these entries. And lastly, we have add-ons which may occur upon a confirmation of price in wave 3 of (3). That would entail a (1)-(2),1-2 setup that breaks out impulsively over the highs of (1) and 1 and pushes pas the .764 extension of the (1)-(2). At that point, we have decent odds of a 3 of (3) underway and the stops can be trailed to near the .618 extension as this pivot region should ideally hold for confident continuation.

Sizing, This aspect is very personal which is to say it varies with the type of trader you are. I primarily want great skew rather than great prices so my discipline is to size small for the initial position. That means definitely a max of 50% of position size and ideally something in the 15-20% range. As for "Post Turn" this is where I enter my largest tranches and I'm willing to take a few papercuts on them. For this portion, I'm doing 40-80%. Lastly, for my style, I'm rather uncomfortable (generally) buying breakouts so while I may add very big size on the "post turn" action of the wave 2 of (3) (within a (1)-(2), 1-2) I'm likely to size very small for buying the confirmation of wave 3 of (3). Maybe 5-10% for this portion.

I think it's helpful to view the "layering in" in terms of these different categories but please consider how you may like to apportion them. Many folks do not want to micro manage or can't be in front of the screens to micro manage early on in the getting of the position. In that case, you'd tend to want to size the initial positions both in wave (2) and wave 2 larger (relatively) and potentially ignore the post-turn tranches. Other folks may be uncomfortable entering at all without great confirmation that a 3 of (3) is underway and they may weight relatively high a break out "Add-on" as their main tranche.

Each entry has its pros and cons

1) Initial

Pros: can set limit orders and requires little management and best prices. Cons: Entry occurs with no confirmation of a low and these often have the most risk / unit of reward

2) Post-Turn

Pros: Supreme risk to reward ratios, with some (albeit minimal) confirmation of a low in place, Cons: very labor intensive and can be costly to realize small losses a few times in choppy market where price is completing its decline as an ending diagonal for example. Also, one may miss getting their desired position in a very strong turn

3) Add-on

Pros: Maximum confirmation, particularly after a (1)-(2), 1-2 breaks out but still decent confirmation for buying a wave 2 after a successful 5 up develops for wave 1 of (3) from wave (2) support. Cons: Markets have many false breakouts and so that particular add-on may entail buying into the highs. Also there may be less good risk / reward ratios depending on how price is developing