How to trade a fast-moving market

The pound versus dollar market is giving a text book example of how to use chart-trading methods, says John C Burford.

As many of my readers know, I have a few favourite trade set-ups that I illustrate from time to time using current charts. One of these is the five up/three down (or three/down five up). And that pattern is running on cable (GBP/USD) at the moment.

Perhaps I should call it the 'five/three' from here. The two numbers refer a particular wave pattern that is clearly recognisable even when the pattern is in progress. Of course, it is of no use to a trader to see the pattern after it has completed there is no profit in doing that. But at various points during the pattern, there are several clues as to where to enter trades. You can anticipate the outcome with high accuracy and what trader would not want to have this information?

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

A perfect five/three' in the GBP/USD

15-8-7-MWT-1

I have found that extended C waves are quite common in the currencies. As a side point, it's worth noting that currency markets often travel farther than most expect. Certainly, the long-term trends in currencies can last many months and even years.

So, after the rally of over nine cents off the low, the market started to reverse and made a 'V' shape top. I use this small pattern to position trade entries. Here it is in close-up:

15-8-7-MWT-2

As the C wave was ending, there was a large momentum divergence at the high. That was a clear warning to expect a change of trend.

Advertisement
Advertisement - Article continues below

Wave 1 down was the apex of the 'V'. When the market rallied in wave 2 and then declined to break that apex (pink bar), it was a sign that the top was very likely in. That was my cue to take a short trade.

Because there was a very large momentum divergence, you could expect a very sharp move down. Remember, the larger the divergence the sharper the reversal. I use this as an early-warning signal to expect a third wave.

Sure enough, the decline in wave 3 was severe. But note where it landed on the precise Fibonacci 78% retrace of the entire A-B-C rally. What's more, there was a momentum divergence there, offering a clue that profits could be taken and to expect an upward reversal.

What's next for GBP/USD?

So where was the second trade entry? Why, at the inverse 'V' at the start of the A wave where you would go long!

15-8-7-MWT-3

What would you expect after a five down? Of course, a three up. Not only that, but the most likely target for the C wave top would be a Fibonacci 50% or 62% retrace. Those are the levels most commonly found as turning points.

As you can see, that is precisely what occurred. That C wave high was the signal to take your profit. So now we have two profitable completed trades of at least 600 pips in total, or £6,000 for every £1 spread bet.

Advertisement
Advertisement - Article continues below

Now what do we expect? A decline off the C wave high aligning the market with the one larger down trend is most common in this setup. But Mr Market didn't go down without a fight!

For the past three weeks, the market has been trapped within a band with the upper bound the Fibonacci 62% level being tested many times. Each time, that resistance has held firm.

Yesterday, the market fell away from that line yet again and is now testing the lower line of support. If my 5/3 scenario is still valid, I expect a break of that support at some stage. That is because the five down is the clue that the main trend remains down and the three up was a counter-trend rally.

15-8-7-MWT-4

There are several examples of the 5/3 pattern in current markets. Here, for example, is one on the Dax:

15-8-7-MWT-5

I have a five down and a three up with a large momentum divergence at the C wave high. There were similar trade entries as in the previous GBP/USD example.

So, where do you think this one will go next?

Advertisement

Recommended

Visit/trading/spread-betting/600852/build-profits-with-this-industrial-equipment-rentals-company
Spread betting

Build profits with this industrial equipment rentals company

United Rentals is poised to benefit from higher spending on infrastructure. Matthew Partridge explains the best way to play it.
26 Feb 2020
Visit/trading/spread-betting/600782/boeings-share-price-plummets-heres-how-to-play-it
Spread betting

Boeing's share price plummets: here's how to play it

Boeing shares have fallen by a third this year. But there could be worse to come. Matthew Partridge explains how traders should play it
10 Feb 2020
Visit/519524/how-my-2019-spreadbetting-tips-fared
Share tips

How my 2019 spreadbetting tips fared

Matthew Partridge reviews performance of his 2019 spreadbetting tips. This year’s winners include Bellway, JD Sports and Taylor Wimpey.
17 Dec 2019
Visit/519285/bettingon-politics-some-safe-labour-bets
Spread betting

Betting on politics: some safe Labour bets

Matthew Partridge outlines a few flutters on what should be safe Labour seats in the general election.
10 Dec 2019

Most Popular

Visit/investments/stockmarkets/600909/will-coronavirus-kill-off-the-bull-market
Stockmarkets

Will coronavirus kill off the bull market?

It seems clear now the coronavirus will at some point go global. And when it does, will it bring down the stockmarket’s bull market? John Stepek looks…
27 Feb 2020
Visit/investments/commodities/gold/600887/gold-price-coronavirus-cost-of-face-masks
Gold

Gold, coronavirus, and the high cost of face masks in northern Italy

The price of gold is spiking – as it always does in a global panic. But this bull market predates the coronavirus epidemic, says Dominic Frisby, and w…
26 Feb 2020
Visit/investments/stockmarkets/600910/what-to-look-out-for-as-panic-over-coronavirus-spreads
Stockmarkets

What to look out for as panic over coronavirus spreads

Markets have started to get properly worried about the coronavirus outbreak. And it’s not just stocks, says John Stepek. Here’s what you should be kee…
28 Feb 2020
Visit/investments/stockmarkets/european-stockmarkets/600725/is-2020-the-year-for-european-small-cap
Sponsored

Is 2020 the year for European small-cap stocks?

SPONSORED CONTENT - Ollie Beckett, manager of the TR European Growth Trust, on why he believes European small-cap stocks are performing well.
12 Feb 2019