The euro trades along my tramline

Evaluating the odds is crucial to making profits, says John C Burford. Here, he draws on all his charting methods to make a great risk-free trade on the euro.

It has been a while since I last covered the euro.It went to ground over the holidays when the markets' gaze was focused on the fiscal cliff in the US.

At my 17 December post, the market was rallying strongly to one of my targets in the 1.32 area. Since then, the market did manage a final thrust to 1.33, but has backed off quite sharply.

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Recall I had my Elliott wave labels which pointed to the pre-Christmas rally being a fifth wave.This is what I wrote: "With the slight new high today and with a potential negative momentum divergence (red bars) we are now in the fifth wave, which could end at any time. Thus, we are potentially in two fifth waves of different degree."

Elliott wave theory states that after the fifth wave has ended, we see a retracement.And this is precisely what occurred, with a decline of 300 pips or so.

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Here is the current daily chart:

13-1-9-MWT-1

(Click on the chart for a larger version)

I have a nice tramline pair drawn in with excellent prior pivot points(PPPs) on the upper line.Naturally, with only a few touch points, I am not relying too heavily on them.

And this morning, the market is struggling with the lower tramline.

If the market declined from here, it would form an A-B-C corrective pattern, which is the ideal form.Where would the likely target be?

13-1-9-MWT-2

(Click on the chart for a larger version)

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For this, we need the third tramline - a possible target is in the pink zone in the 1.29 area.

And if this occurs, it would complete the A-B-C correction and set the stage for a resumption of the rally above 1.33.

So let's back up a few days.Was there a low-risk trade on?There certainly was!

13-1-9-MWT-3

(Click on the chart for a larger version)

When the market failed at the 1.33 level, it declined to challenge the major chart support just below 1.32 (pink zone).

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A short sale there was indicated - and a stop order was the best policy, of course.

The support was duly broken, and the trade was stopped in.

A second possible trade

But if this trade was missed, there was another one coming along:

13-1-9-MWT-4

(Click on the chart for a larger version)

The bounce off the 1.30 low has a clear A-B-C pattern (green bars) and it carried to the Fibonacci 38% retrace.That was the place to enter a short trade.

Yesterday, the market backed off this level and is working lower as it struggles with the tramline as I write.

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This trade was protected by a close stop, and now this stop can be adjusted to break-even, making this a riskless trade.

That is the essence of my style of trading: enter at a low-risk level and then move protective stop to break even when conditions allow.Take at least partial profits when targets are hit.

Finally, here is the 15-minute chart showing a tentative tramline pair:

13-1-9-MWT-5

(Click on the chart for a larger version)

The danger zone for the bulls is the pink zone. If the market can break below the lower tramline, we should see my 1.29 target within sight.

But if the market can rally to challenge the upper tramline, that would indicate the long-term tramline is providing enough support to overcome the bearish implications of the Elliott wave patterns.

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Remember, trading the markets is a percentage game there no dead certs. All we can do is try to evaluate the relative odds of the various outcomes and protect ourselves in case we are wrong.

Being wrong is no disgrace, but losing a large chunk of your capital certainly is!

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.

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