I have another great euro trade working

John C Burford explains why, when it comes to trading the euro, Fibonacci really is your best friend.

I last covered the euro on 18 March after I had set a small test for anyone who is interested in making money using the tramline trading methods.

To recap, this was the chart I posted the previous Wednesday:

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160318-MWT-01

I asked what the likely path of least resistance was out of the wedge in other words, was there a trade there?

By Friday, we had the answer it was up, confirming the C wave labels that were only a possibility on the Wednesday.

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And this was the result a sharp rally in EUR/USD, which confounded many traders, because the Fed made a U-turn on rate rises and turned soft:

160318-MWT-02

It is all very well guessing the direction correctly, but what a swing trader wants to know is how far a rally will likely carry following a great entry. That will provide a target where profits can be taken, of course.

And this is what I wrote: "But also, wave C is a Fibonacci 62% multiple of wave A at the 1.1310 area and this is a very common wave relationship."

By measuring the height of the A wave off its spiky low to its equally spiky high, I had my target for the extent of the rally and that was just above the 1.13 level. Isn't that a very simple and pretty method? Little guesswork is involved and you can set your exit orders up ahead of time. It has the added advantage of needing only a calculator, not fancy and expensive software.

To confirm that rally was a high, the market declined immediately.

So that sets up another small test and a most beautiful example of how precise Fibonacci levels can be, and why Fibonacci is a trader's best friend.

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This is the hourly chart I captured at 3.30pm last Wednesday. It shows my A-B-C and the decline off the C wave high. Do you notice anything striking about this decline? It bears an uncanny similarity to the form of the B wave, doesn't it? It has the same stair-step succession of overlapping mini-waves down, which is characteristic of a corrective move.

And because the B wave was a corrective wave to the one larger trend, which was up, odds favour a similar result if the market can punch up above the blue trendline.

16-3-30-MWT-3

But what is the likely turning level for this current dip? This is where use of the Fibonacci method shines.

Here is the chart updated to Monday:

16-3-30-MWT-4

Measuring the height from the spike 1.822 low to the C wave high at 1.1342, I have a rise of 0.0246 cents.

Applying an accurate Fibonacci 38.2% retrace to this figure, I get a target at 1.1143 which is an amazing one tick away from the actual recorded 1.1144.

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To me, that is a perfect hit and a beautiful validation of the Fibonacci method.

Of course, I evaluated this target long before the market had hit it, which allowed me to place a resting buy order at that level. In practice, I like to give it ten pips or so inside the target to allow for a possible slight under-hit. I don't want to miss a potential good trade, because I was too stingy on the target.

Of course, there is no guarantee that this will be a major winner (much depends on how I handle the trade). What it does offer is a low-risk possibility, because I could set my protective stop only 20 pips beneath. And in the hyperactive currency markets, that is wafer-thin.

And with a grateful nod to Yellen's uber-dovish comments yesterday, EUR/USD shot up with this result:

16-3-30-MWT-5

Yesterday's rally surely shocked many traders who were expecting the dollar to remain strong. Just as in the red A and C waves, much of the buying was by dollar-long traders caught in a short squeeze.

These long-dollar traders evidently take the confusing Fed utterances at face value a very dangerous game.

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So now the picture has changed somewhat. The strong rally is testing the old high and if it can punch above it, it would set up the larger purple A-B-C labels.

Now I have a long trade working, I have a tough decision to make when to take profits. There is an old market saying that getting into a trade is relatively easy it is in the getting out that is difficult.

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