My tramline holds and the euro rallies

Today, I will follow up on Wednesday’s post on the euro as it has demonstrated one of the problems – and solutions – of trading with tramlines.

On Wednesday, I noted the market was at a crossroads – and a break of the lower tramline would probably point the way to lower prices. 

The chart below was the chart as it was then.

And this is what I wrote: “The danger zone for the bulls is the pink zone.

“If the market can break below the lower tramline, we should see my 1.29 target within sight.”

EUR/USD spread betting chart

(Click on the chart for a larger version)

Since then, the market did indeed drop beneath my lower tramline and a short sale was indicated.

But where to protect it? Certainly somewhere inside the tramline channel, and I like to use the most recent minor high as my guide.

Beware the head fake

This is how trading developed later on Wednesday and Thursday:

EUR/USD spread betting chart

(Click on the chart for a larger version)

A short sale could have been taken at the red arrow and protective stop in the pink zone, just above the most recent minor high.

And this is how the market moved after that:

EUR/USD spread betting chart

(Click on the chart for a larger version)

The market took fright from the lower tramline and roared upwards, stopping that trade out. That was another example of a head fake.

Traders must be aware that if trading up close to a tramline, you run the risk of encountering a head fake such as this.

Naturally, if you like to see more confirmation of a tramline break, you may not have taken that trade.

But one thing is certain – if the market does not follow through on a tramline break, look for a swift reversal!

Why I reversed my short trade position

So was there any clue that this vigorous rally could have been anticipated? I believe there was, and it lies in the decline off the recent 2 January high at 1.33.

Here is my chart I had running yesterday:

EUR/USD spread betting chart

(Click on the chart for a larger version)

Right away, my downtrend line sports at least eight touch points, making it a very reliable line of support/resistance. With so many precise touch points, I could say that if this line were to be penetrated, the rally should be vigorous – and that is exactly what occurred.

So, my strategy after being stopped out of the short trade was to reverse position and go long on this trendline break. My protective stop was placed just below recent lows.

OK, I had a nice long position in a rapidly rising market. Where was my first target?

EUR/USD spread betting chart

(Click on the chart for a larger version)

With my tramlines now drawn, I could set my first target around my upper tramline, which was hit yesterday.

A short-term trader would look to take profits there for a very quick 200-pip profit.

Momentum is high

So now the market is challenging the 1.33 level again – a level where the market turned back previously.

The question is: will it penetrate it?

For clues, let’s back up to the bigger picture. Here is the daily chart:

EUR/USD spread betting chart

(Click on the chart for a larger version)

I have a superb upper tramline with all those prior pivot points (PPPs), while the lower tramline is good with several touch points.

If the market can rally above 1.33, the target is my upper tramline in the 1.35 area.

And with yesterday’s strong thrust, momentum is high for such a push.

• If you’re a new reader, or need a reminder about some of the methods I refer to in my trades, then do have a look at my introductory videos:

The essentials of tramline trading

Advanced tramline trading

An introduction to Elliott wave theory

Advanced trading with Elliott waves

Trading with Fibonacci levels

Trading with ‘momentum’

Putting it all together

• Don’t miss my next trading insight. To receive all my spread betting blog posts by email, as soon as I’ve written them, just sign up here
. If you have any queries regarding MoneyWeek Trader, please contact us here.

  • Leo

    I think John should start a running account of P/L. Paper trading would be fine.

    Without that it’s difficult to judge the effectiveness of the advice.

  • Ray

    It wasn’t that the EUR took fright from your tramline (which I’m sure it is unaware of) it rallied due to Draghi stating that it was a “unanimous” decision to keep interest rates as they are when previously there had been some ECB members voting for a cut in rates. That’s what sparked the move.

Merryn

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