Thursday, October 7, 2010

10/7/10 Update #2 EUR/USD - A Trade Setup Example

Update #2

Looks like wave 5 of 3/c was a clean ending diagonal. Double wedgie.

7:50 PM Update

Well what do you know another fine example of EW at work. It's almost like magic.

Wave 3/c achieved equality with 1/a, which is a common relationship found in EW and something I was expecting would likely happen given the count and the common ratio.

Check out the first post when I identified the first 5 waves. Once that had occurred, it provided one with a pretty decent setup to trade this wave 3/C.

Here's a simple explanation on the basic setup since that first post. By using basic EW analysis we know that impulse waves or corrective waves for the most part always move in at least a three wave series, either 1-2-3 (impulse) or a-b-c (corrective) . And by trading just 3s or Cs, you can increase your odds on catching that 3rd/C wave once waves 1 and 2 were identified.

In this case, once I saw 5 waves up , I knew that was either a wave 1 or wave A, and basically the first wave of a minimum 3 wave series. What would come next is either a wave 2 or wave b.

Given that we know typical wave retracements for waves 2/bbs (50-62%) , I was expecting a retracement of 1/a to approximately 50%. Once 2 / b pulled back to this area (50% in this case) and the structure looked correct, this was the signal to take a long position to ride either 3/c up. The odds were very much in one's favor at the moment.

So what happened? The EUR rallied in a wave 3/c. So now what? How long do you hold it?

Well, we know that waves 3/C are impulsive in nature, meaning they contain 5 waves within them. So what do you do? You count 5 waves up like I did.

But not only that, RN Elliott also discovered that waves extended by Fib ratios as well and equality or a 1:1 ratio was very common. So as you can see on my top chart, the Fib extension tool indicated that wave 3/C equaled 1/a at 1.40.

On my 9/22 post, I commented on this relationship and the expected target.

So here we are now. What's next?

Well given that wave 3 /C may also extend 1/a by 1.618 times, it is possible we may rally to 1.49.

So one must ask at this point, is the 5 wave structure up from 2 / b all of 3/c or is it just the first wave in a series of five waves that will eventually make up wave 3/c.

Well this structure as of now looks fairly complete and hit a perfect wave ratio. So it wouldn't hurt to take some off and wait to see what type of pullback occurs.

If this were complete, the EUR would pullback beyond 2/b and you would know that 3/c is complete because if it were only wave 1 of 3/c, a wave 2 pullback cannot pullback further than the start of wave 1.

However, if you see a pullback of 50-62% and then it bounces, odds are starting to favor that you may see another 5 wave series higher.

If you want to read up and follow along as the structure was progressing, check out the EUR/USD label.

I hope this was helpful to folks trying to learn how to trade with EW. Comments and suggestions are always welcomed.
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