Thursday, November 5, 2009

USDCAD—Three hour Elliott Wave Count

Here’s a reasonable, if you buy the theory, Elliott Wave (EW) count on the USDCAD three-hour chart. I use EW counts to gauge market psychology not for trading per se. On the chart below there’s a clear 5-wave pattern up from the low of 1.0208 in mid-March. It topped out at 1.0870 on Monday.

What’s less clear is the correction. It could be a completed ABC as I’ve labeled it. What’s nice about this, if it’s true and that’s a big if, is that the correction didn’t exceed 50% of the overall rise. This would have been 1.0539 whereas the low yesterday was 1.0597. If this correction is over then we should be ready to begin a third wave. Third waves are, as Prechter and Frost write in their book, Elliott Wave Principle, “wonders to behold. They are strong and broad, and the trend at this point is unmistakable” (p.80). Well, wouldn’t that be lovely? Will I have enough deposit slips? The only problem with this, and the one that should prevent anyone from committing their entire account to a long position on the USDCAD, is that we don’t know for sure this correction is over. I can make a case for how we could easily be in the first leg of a correction.

Another possible count is that we are in wave four of the move up. This is appealing because it would be different from wave two in character and price (what EW calls alternation) whereas wave four and two look very similar on this. Wave four might not be yet over but in this interpretation it cannot drop below 1.0430. That’s one of the three basic rules of EW—that wave four cannot get into the price territory of wave one.

Well, I’ve had my dose of EW this morning. The most recent candle closed at 1.0635. I’ve been long twice since yesterday, only to stop out slightly above breakeven. Here’s the three-hour chart. I’ve traced the possible wave four (the second scenario) in green:
© Dianne Fecteau, 2009. No part of this material may be reproduced in any form, or referred to in any other publication, without the express written permission of the author.

My purpose in writing this blog is to show you how one trader, me, makes trading decisions and survives while trading Forex. One of the biggest problems I had when I first started trading was trying to apply the “rules” to actual trades. Another was the psychology—limiting losses and letting profits run. If you study my blog you’ll see how I deal with both those issues. So my writings are not trade recommendations but rather educational in purpose. You have to decide on your own approach to trading. Remember that trading is risky.

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