How to set price targets in the euro

In previous posts: Timing trades in a volatile market and A textbook example of tramline trading in the euro market, I showed how I set price and time targets in the euro during the wave B drop from the 14 July high to the 17 July low at the 1.40 area.

Using my tramline constructions in combination with Fibonacci retracements, I was able to set an accurate target in both price and time for short-term trades.

In other words, I can target both a price, and a time at which I think it will be reached.

This was the chart at the time:

(Click on the chart for a larger version)

The purple box indicates where the lower tramline meets the 61.8% Fibonacci retracement level. So that gave me a very good idea of both a price to target, and a rough expectation of when it would hit that target: very useful for short-term trades.

Can I do it again?

But now the market has rallied very sharply from the 1.40 low to the current 1.44 area.

We have hit one target, can we see another on the upside?

In my previous post, I explained how, by using the often-observed wave relationship in an A-B-C sequence, I can set the 1.4450 area as my target.

As of this morning, this is how the chart appears:

(Click on the chart for a larger version)

We have waves A and B in place and are now making wave C.

But look at the lower tramline. When the 1.40 low was put in earlier this week, I could draw this line (all I need is two points).

And admire how the market fell yesterday right to this line – and then bounced up in a very sharp reaction.

This shows the power of using tramlines for forecasting turning points.

I have marked the 1.4450 as my target.

Now, I cannot be too precise here – I will be happy with a range of plus or minus 30 pips.

Also, a price target is just that – and targets can be exceeded. In fact, they often are. I use them as a guide to a minimum objective.

A second way to set targets

But that is not all – I have another independent method of target discovery.

Here is the daily chart:

(Click on the chart for a larger version)

Right away, we can see the very clear down-sloping tramline coming off the major highs starting with the big one at 1.49 in May.

And the market is right now trying to push through this line as I write.

The tramline passes through the 1.4450 area. This tramline has been successful at repelling the previous advances, so it represents very strong resistance.

The odds are that it will do so again.

So now I have two ways of coming up with a target of 1.4450. Isn’t that pretty? Not only pretty, but it reinforces the view that the 1.4450 level will be very tough to break through.

And that is what we are always looking for – a situation that puts the odds squarely on our side.

Taking a step back, recall short-term traders were short at the upper tramline (see first chart above) and were stopped out on a break above it and then went long. They will be looking to take profits in this area.

From an oversold momentum reading at the 1.40 area, we now have an overbought reading in the 1.44 area (on the hourly chart).

These are the conditions I look for when deciding to trade.

As the market approaches 1.4450 this morning, traders will be looking to place short trades. Of course, I shall be using my 3% rule to limit losses if I am wrong.

The 50 pip loss on the short trade will be more than made up by the 300 pip gain on the long trade.

Trading losses are inevitable and all traders must be able to take them without undue emotion. This is the mark of a good trader.

Each trade is a new event and the past is past.