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One way of technical analysis is the Elliott wave that attempts to forecast trends in price movement. Elliott Wave Theory was developed by Ralph Nelson Elliott in the late 1920s. He discovered that the stock markets traded in repetitive cycles. Elliott discovered that these market cycles resulted from people’s psychology. He found that the upward and downward always showed up in the same repetitive patterns, which is called “waves”.
Elliott made detailed stock market predictions based on the wave patterns. An impulsive wave, which goes with the main trend, there are five waves in its pattern. On a smaller scale, within each of the impulsive waves, there are also five waves.

When a price went up, it is usually followed by correction or corrective wave. The Elliott Wave Theory says that five waves move in the direction of the main trend will be followed by three corrective waves (a 5-3 move). This 5-3 move then becomes two subdivisions of the next higher 5-3 wave. So one complete Elliott wave consists of eight waves of two phases: five-wave impulse phase, and the three-wave corrective phase.

The impulsive Wave have five wave: wave 1, wave 2, wave 3, wave 4, and wave 5. Wave 2 and wave 4 are small corrective wave in the increasing trend. In the corrective wave, there are three wave: wave A, wave B, and wave C. Wave B is the small technical rebound in the decreasing trend.

A trader seeing the Elliott Wave can ride the Wave 3 and Wave 5 and entered a long trade. He can also enter a short trade during at Wave A and Wave C.

An option style refers to whether option contract can be exercised before the expiration date or not. There are two types of option contract: European options and American options. European options can not be exercised before the expiration date of the contract. American options can be exercised by any time during the life of the contract.

European Options are most commonly the style use by indices i.e. the S&P 500. American options are the style of choice for most stock options.

For example, let’s say you bought a call option that has huge profit after a couple of days. If the contract stated an American style you could exercise the option any time. But if the contract stated European style, you cannot exercise until the expiry date of the contract.

The main difference between the two styles is how the options are priced. European options are typically valued using the Black-Scholes formula. This is a simple equation that has become standard in the financial community. There are no general formula for American options, but a choice of models to approximate the price are available like binomial options model.

Money management is very important if you are a trader, whether you are stock trader or forex trader. By using money management you can stay alive longer in the game.

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  From the image above you can see the result of two trader. The first trader risk 5% of his money each trade. The second trader risk 10% of his money each trade. You can see that after 10 loss trade, first trader will have more money left. You can see the importance of money management from the illustration if you have bad luck and loss ten trades in a row. Lesson learned: Always risk a small percentage of your money, below 5%. A good trader will know that you will not always win, so you must risk a small percentage of their total money so that they can survive those losing streaks.
• Before enter a trade you must calculate the risk / reward ratio. When chances to win a trade is smaller than potential losses, don’t trade! You should only trade if the risk ratio is 1:3. For example if broker fee or spread is $3, and you only want to lose $3 for a total of $6 ($3 + $3) loss, then you will only close position when it loss $3 and win 3 * $6 = $18.
• You should set protective stops for your trade. Remember the 1:3 risk ratio? You can set the level you want to cut loss from that number.