The euro is trading beautifully against the dollar

On 8 January, I was tracking the progress of the EUR/USD. I forecast the downward move as a five-wave pattern. This was the chart:

EUR/USD spread betting chart

So far, the move off the 1.39 spike high is in four waves. What I was looking for was a final fifth wave down to terminate close to 1.35 at the Fibonacci 62% level. Let’s see how this has played out:

EUR/USD spread betting chart

I did get my fifth wave. In a textbook move, it carried to the 1.3550 area and on a large positive-momentum divergence (red bar). But it didn’t quite carry to the Fibonacci 62% level. Since that does happen, we must be alert to these near-misses.

Knowing when to exit

Incidentally, it never ceases to amaze me how often we do get accurate hits on the Fibonacci levels. In terms of real life trading, it is best to allow the market some room for a possible near-miss and to exit the market just before your exact target. You may give up a few ticks, but I would rather do that and ensure my profit.

If you religiously stick with your exact Fibonacci level as your exit, you may see the market just fail to hit it. The market then moves against you and takes away your hard-earned profit. Don’t let that happen to you!


MONEYWEEK TRADER

Claim your FREE report: The five-step game-plan for
spread betting profits


Could this be a major move up?

When my fifth wave was in, the market made a solid relief rally. which is still in progress. The question is: could this be the start of a major move up or will the relief rally run out of steam with the market going on to new lows?

Let’s back up a little and see where the market is positioned in the larger picture:

EUR/USD spread betting chart

The upper tramline pair is the one I showed last time. And with the tramline break, I could draw in my third (lowest) tramline equidistant. This tramline now offers a short-term price target. And lo and behold, the market dropped to the new tramline and turned back up from that support line. Isn’t that pretty?

A short trade taken at the tramline break and exited near the lowest tramline would have produced a gain of 100-150 pips.

No-man’s land

OK, now the market is between tramlines and in no-man’s-land. After a tramline break, the market often attempts a kiss back on the underside of the line. That would take the market up to the 1.38 area again and provide another shorting opportunity. But is there enough buying power left to get it there?

The alternative is for the market to test the lower tramline and eventually break below it. Remember, the current rally is totally expected after the five waves down. Although it can be viewed as a three-wave affair, it is not a totally convincing A-B-C.

It’s time to back up even more and look at the bigger picture:

EUR/USD spread betting chart

Here is my large wedge pattern where the trend lines are converging and the market is very close to the lower line. When markets move out of their wedge, they often move very swiftly, which places the area just under the lower line as my danger zone (for the bulls).

And with the clear five waves down just completed on the hourly chart, the main trend is very likely down.

• 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.
ScreenHunter_01 Mar. 25 09.51

New to MoneyWeek?

john-burford-141x188

Welcome, and thank you for visiting us.

Here at MoneyWeek, our aim is simple. To give you intelligent and enjoyable commentary on the most important financial stories of the week, and tell you how to profit from them.

If you've enjoyed what you've read so far, I've got something you'll definitely be interested in.

Three times a week I send out our spread betting email, 'MoneyWeek Trader', which gives you tips, secrets and trading strategies – to help you avoid the traps most spread betters fall into, and maximise your profits.

And with your permission, I'd like to send you MoneyWeek Trader for FREE.

To sign-up enter your email address below.

We hope you enjoy your stay on the site. Good luck with your investments!

John C Burford,
Editor, MoneyWeek Trader

(No thanks)

Because these emails are completely free, we do have to fund them with advertising. Occasionally we will send you promotional emails, however we will never give, sell or rent your email address to any other companies.For more information, please see our Privacy policy.

 

• Stay up to date with MoneyWeek: Follow us on TwitterFacebook and Google+

Comment on this article

MoneyWeek magazine

Latest issue:

Magazine cover
Profit from the agriculture boom

The UK's best-selling financial magazine. Take a FREE trial today.
Claim 3 FREE Issues
Shale gas 'fracking' promises to transform Britain's energy market. Find out what it is, what it means, and how to invest.

More from MoneyWeek

The problem with the Bank of England

Fracking: Nine reasons not to get carried away

Five small-cap stocks worth a flutter

This Dutch company could help us tame floods

ScreenHunter_01 Mar. 25 09.51

Get the latest tips and investment opportunities from MoneyWeek magazine: Claim 3 FREE issues HERE