How to pick a trade using tramlines

The euro has been through the wringer in 2015.

As if Mario Draghi’s giant money-printing programme wasn’t enough, the latest Greek crisis is sending the euro tumbling.

But I think the Greek crisis will be resolved shortly. Greece and the eurozone have too much to lose if Greece is forced to leave the single currency.

How to pick a trading target using tramlines

Friday’s rally in the euro seems to indicate that the market sees things the same way I do.

Today, I want to use this example to show how my tramline rules can help pinpoint a price target with high accuracy.

In my last post on the euro on 4 February, I showed this hourly chart of the final Elliott wave down to the 1.11 low:

EUR/USD spread betting chart

From the December high, the market traced a lovely five-wave pattern down. And the entire move was contained in the trading channel defined by my tramline pair.

Away from the world of charts, in the market during this time rumours were swirling that the European Central Bank (ECB) would finally cave in to a scheme of quantitative easing.

The European bank was the last large-economy central bank to resist QE, following the examples of the US Fed, the Bank of England and the Japanese central bank. Global liquidity was going to be pumped up to even higher levels.

But with the Fed having stopped printing money last year and the ECB about to get started, the EUR/USD market came under severe pressure.

This was a classic ‘sell the rumour and buy the news’. By the time the European Central Bank finally confirmed its money-printing programme, the euro fell to the 1.11 low – and started a recovery.

This recovery led to the break of the upper tramline, shown above, in a bullish show of strength.

This looks like a turning point

The question was: is this the start of a more substantial advance?

The very first thing I do when I have found a reliable tramline pair and one of the tramlines has been penetrated is to draw in the third tramline. Remember, this is set equidistant from the other two – and here it is:

EUR/USD spread betting chart

Admittedly, the recovery has been weak, but my target at T3 was hit on Friday.

Now the question is: what now?  Will the market push up through T3 or will it sink back down in the new trading channel between the tramlines T3 and the central line?

For clues, we need to zero in on the finer scale. This is the 15-minute chart as I write – and I have a possible trade staring at me:

EUR/USD spread betting chart

The big reversal on Friday reached just under the 1.1440 level, which lay on the third tramline. Because the third tramline represents a line of resistance, the market is currently bouncing off it.

This morning, it has retreated in a three-wave Elliott wave A-B-C correction to the Fibonacci 62% retrace of Friday’s big move.

So, if this level holds, the 62% level could provide the springboard for another assault on the third tramline. After all, the 62% level is the most common retracement if a reversal is on.

The point is this: this Fibonacci level could provide a low-risk trading opportunity for a possible rally because your protective stop could be placed very close to entry.

The other point to keep in mind is this: there is no way any trader could know with certainty which way the market will move. But when you have the odds on your side using well-established trading principles, your chances of success are enhanced.

But whether this particular trade works out is not critical for a professional trader, because they know that over time, they will take a few minor losses, but will also find some major winners – and the gains will exceed the losses.

That is all a trader can wish for.