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Truncation Elliott used the word "failure" to describe a situation in which the fifth wave does not move beyond the end of the third. We prefer the less connotative term, "truncation," or "truncated fifth." A truncation can usually be verified by noting that the presumed fifth wave contains the necessary five subwaves, as illustrated in Figures 1-11 and 1-12. Truncation often occurs following an extensively strong third wave. The U.S. stock market provides two examples of major degree truncated fifths since 1932. The first occurred in October 1962 at the time of the Cuban crisis (see Figure 1-13). It followed the crash that occurred as wave 3. The second occurred at year-end in 1976 (see Figure 1-14). It followed the soaring and broad wave (3) that took place from October 1975 to March 1976. Diagonal Triangles A diagonal triangle is a motive pattern yet not an impulse, as it has one or two corrective characteristics. Diagonal triangles substitute for impulses at specific locations in the wave structure. As with impulses, no reactionary subwave fully retraces the preceding actionary subwave, and the third subwave is never the shortest. However, diagonal triangles are the only five-wave structures in the direction of the main trend within which wave four almost always moves into the price territory of (i.e., overlaps) wave one. On rare occasions, a diagonal triangle may end in a truncation, although in our experience such truncations occur only by the slimmest of margins. Ending Diagonal An ending diagonal is a special type of wave that occurs primarily in the fifth wave position at times when the preceding move has gone "too far too fast," as Elliott put it. A very small percentage of ending diagonals appear in the C wave position of A-B-C formations. In double or triple threes (to be covered in Lesson 9), they appear only as the final "C" wave. In all cases, they are found at the termination points of larger patterns, indicating exhaustion of the larger movement. Ending diagonals take a wedge shape within two converging lines, with each subwave, including waves 1, 3 and 5, subdividing into a "three," which is otherwise a corrective wave phenomenon. The ending diagonal is illustrated in Figures 1-15 and 1-16 and shown in its typical position in larger impulse waves. Figure 1-15 Figure 1-16 We have found one case in which the pattern's boundary lines diverged, creating an expanding wedge rather than a contracting one. However, it is unsatisfying analytically in that its third wave was the shortest actionary wave, the entire formation was larger than normal, and another interpretation was possible, if not attractive. For these reasons, we do not include it as a valid variation. Ending diagonals have occurred recently in Minor degree as in early 1978, in Minute degree as in February-March 1976, and in Subminuette degree as in June 1976. Figures 1-17 and 1-18 show two of these periods, illustrating one upward and one downward "real-life" formation. Figure 1-19 shows our real-life possible expanding diagonal triangle. Notice that in each case, an important change of direction followed. Although not so illustrated in Figures 1-15 and 1-16, fifth waves of diagonal triangles often end in a "throw-over," i.e., a brief break of the trendline connecting the end points of waves one and three. Figures 1-17 and 1-19 show real life examples. While volume tends to diminish as a diagonal triangle of small degree progresses, the pattern always ends with a spike of relatively high volume when a throw-over occurs. On rare occasions, the fifth subwave will fall short of its resistance trendline. A rising diagonal is bearish and is usually followed by a sharp decline retracing at least back to the level where it began. A falling diagonal by the same token is bullish, usually giving rise to an upward thrust. Fifth wave extensions, truncated fifths and ending diagonal triangles all imply the same thing: dramatic reversal ahead. At some turning points, two of these phenomena have occurred together at different degrees, compounding the violence of the next move in the opposite direction.
Planning your exit Since no human can see into the future, unfortunately new and experienced traders alike will sometimes have to contend with losing trades. Emotions can run high at these times. Watching your hard-earned money being depleted from your account is an uncomfortable experience - and it can compromise your decision-making abilities. That's why it's important to decide - right at the outset - where you'll get out if this trade doesn't go well. Rule 1: always have an exit strategy You need an exit plan - a strategy for managing the risk of the position, so that one bad trade won't wipe out a significant chunk of your trading capital. But simply telling yourself where you want to get out may not be enough. Consider the scenario: you head to bed for the night with a position going well, but by the time you wake up in the morning the market has taken a turn against you. Or perhaps you're watching a position while travelling on the train. You enter an area with no mobile or wifi service, and by the time you get back online the market has moved past your planned exit level. Shutter stock So once you’ve decided where you’ll close the trade, you need an automated mechanism to protect you when you’re not in control. And that’s our second rule: Rule 2: set a stop Setting a stop reinforces your exit strategy. The resting order will close your position if the market hits the level you specify, even if you're not logged in to your platform at the time. It also removes the need for you to make a difficult decision under pressure. It's easy to disregard the emotional aspects of trading. But, especially when you're new to the markets and still learning, the rollercoaster of feelings created by losing a trade can have a substantial impact. Example Let's say you take a long position and the market immediately starts to rise, putting you into profit. However, suddenly it goes into a sharp reversal, and to your dismay your winning trade rapidly turns into a loser.As the position drives further below your entry price, you keep hoping for recovery. But that hope turns into wishful thinking as prices continue to deteriorate.Finally, you're left with a feeling of desperation. It's clear that prices aren't coming back anytime soon, and you have no choice but to realise a loss. Price chart In this situation, the financial impact certainly stings. But it's the emotional toll that can make your next trade more complicated, as you try to recover. Just one idea that didn't work out could define how you move forward in a market. For example, you might feel tempted to rush into a new position without proper consideration, in an effort to claw back your losses as quickly as possible. One easy way to help avoid this issue is to decide where to set your stop before opening a position, and set it up while executing the trade, so your position is never left unprotected. With a stop-loss order in place at your pre-defined exit level, if that price is met you don't have to make a decision about to what to do. You've done your planning in advance, and your position is closed for you. Lesson summary Every trader needs to be prepared to suffer some losses Always plan where you'll exit a trade if it doesn't go well Set a stop to close the position automatically for you