Tuesday, November 9, 2010

EURUSD—two sides of the argument

My long Euro trade stopped at break even. The pair dropped to 1.3824 from which it has now rallied to 1.3971 so far this morning.

The question is whether this is the beginning of a trend reversal (and certainly there are those in the Elliot Wave (EW) camp who keep beating this drum as well as others who are basically perma-bears as far as the Euro) or is this a small correction from which a larger rally can take place? Nobody, but nobody has the absolute answer to that question but one can hypothesize.

Looking at weakness first, one has to have the underlying assumption that the move up from the June lows is part of an overall corrective move in which the general trend of the Euro is down. Under this scenario, one can build a case for wave C of that correction to be in progress or near its end. Remember that wave C could extend as high as 1.618 that of A (1.4998). If you look at a three-year daily chart, you can make an EW count work if you assume that this is a correction within an overriding wave three. It can't be wave four because it would have entered the territory of wave one which is an inviolate rule. So it's best to see it as an unfolding wave three and going through a corrective phase within that wave. I've labeled the daily chart below so 2 circle of three is in progress. Do I believe this? Who cares what I believe? This is a way of looking at a chart.

If, however, I hold this theory, then I will be looking to short at some point. My suspicion is the pair can still get to the 1.45 area. As I've frequently written, 1.4450 is .618 of the move down from 1.6041, the downtrend line from the 1.6041 high comes in around 1.4500, and the high this past January was 1.4579. This would still leave some room for pips if one bought but then you run into the issue of whether a long position ties in with your risk strategy. (You do have a risk strategy, right? Something other than you'll stay in until you can't stand the losses any longer?)

Since one can draw a corrective channel on the daily chart, my inclination is to try a short at the top of that channel (around 1.4070) and have a tight stop. This is most likely the path I will follow unless I begin to see real strength or weakness (in the form of momentum) before that. Even with strength, however, it's possible to buy on a breakout of the channel (or better, a break and a retest). So 1.4070 seems like a figure to keep in mind. On a one-hour chart (not shown) one can trace out a five-wave declining pattern within a corrective channel that would put a sell point closer to 1.3900. These are choices traders have to make.

On the long side, I have a point and figure chart that shows a forming pattern named a catapult. I don't have time to go into this here but it's basically a buy signal, a correction that doesn't generate a sell signal, and then a breakout higher than the prior one. If I subscribe to this theory I can find some support for it in other methods I use. In that case, I'd buy now and take the ride up to potentially 1.50. However, one could still buy around 1.4070 (or 1.39) and have a nice trade.

Here's the daily chart:

© Dianne Fecteau, 2010. 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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