An Elliott Wave Trader’s Journey – March and April 2017May 21, 2017
I would like to share my Elliott wave trader journey for March and April 2017. It certainly is an interesting one for anyone interested in how to trade Forex.
"Look at me, gentlemen...for I am the poor fool who built all this!" - Joseph Stickney
Counting waves is time-consuming. However, it is rewarding too: a Forex chart analyzed through a wave pattern holds valuable information. But making a correct analysis and trading it, are two different stories.
These two months proved to be difficult. Trading the way we do requires a close attention to details. Not only technical analysis matters but fundamental analysis too. One Tweet from President Trump and the chart goes in the wrong direction.
How to Become an Elliott Wave Trader?
The Elliott wave theory sounds exotic. In a way, it is: you'll impress anyone asking what are you doing for a living? I'm a trader! How to become a trader? Learn Elliott waves!
The Forex market is huge. As retail traders, we're not influencing the way it moves. We're too small, both in size, as well as in actual volume traded. Have you ever wondered why VSA (Volume Spread Analysis) and Forex trading simply don't work together? Because volume is a mystery: it's not known.
March 2017 - Wave Charts to Start With
The EURAUD chart from above shows a beautiful pattern: a triangle. Not only it is a triangle, but a contracting one. The Elliott wave principle calls contracting triangles the favorite way for the market to consolidate.
This one was a special type: the b-d and a-c trend lines, while contracting, point to lower levels. In other words, price action was bearish as bearish can be. Still, I went long.
Very dangerous setup as the time element needs to be respected. Like anything in trading, price action relates to the time frame. In this case, the daily one. Therefore, patience is needed for any meaningful outcome.
When trading such a setup, you must have some time in mind for the price to reach the target. We exited too early and didn't stay for it. Probabilities favored a different outcome.
Trading is a game of probabilities. Especially when a trade comes from the wave theory. One should answer the following question: is this an impulsive or corrective wave? Moreover, if you're able to put a time on your analysis, you have a competitive advantage.
The triangle almost broke the b-d trend line on a strong push higher from the lows. We were long, the flows pouring out of the AUD in madness. Yet, it failed to break it. We exited with no regrets, simply pulling the trigger.
How Can I Make Money with Elliott Wave?
Discipline holds the key. In the end, the b-d trend line broke, but without us. We ended up buying on another dip to the 1.40 level and exiting again. The b-d trend line still held, while time almost expired.
As it turned out, the triangle broke in the last day allowed for the pattern to do so. 1.4330 came in a jiffy after that. Looking at the current 1.4990 level at the time of this writing, you have an idea how powerful an Elliott wave forecast is.
Any Elliott wave trader knows what is a wave: an impulsive or corrective move. Even if the market travels in an impulsive wave, chances are a correction of a bigger degree forms.
Bigger Picture on a Cross
March 1, our Premium and Platinum members enjoyed a big discussion on the higher time frames. The EURJPY pair was the subject: we were building a bullish case. Check it here:
The beauty of an Elliott wave forecast comes from its power. This, in turn, derives from the bigger time frames. If you back the knowledge with historical data, you have a winner. One may be wrong one or two months, as the market has a tendency to screw it. But in the end it will come to the right place.
Despite being bullish on the cross, we didn't buy. Fundamental analysis held us back: French elections loomed. Learn one lesson from me: if your Forex education is technical, stick to this side of trading. Combining them leads to nothing.
The Importance of a Trading Plan
March 9, all our subscribers had access to the following trading plan: the idea was to buy the EURUSD in three steps. Recognize the pattern? Of course, a contracting triangle. What is a wave's name in this case: a leg of a contracting triangle.
A trader must stick to the trading plan. Otherwise, what's the purpose of making it in the first place? An Elliott wave trader must do that too. While technical analysis gives the road map, or where the market goes, the fundamental analysis gives the reason why this happens.
In Forex trading, such reasons range from central banker's verbal intervention, political and geopolitical factors, and so on. Pending orders are a great tool when planning. Buying from higher levels means buying strength, not overbought areas. Selling weakness works best when selling occurs from lower levels. Going with the market flow is great.
The problem comes from, again, the noise surrounding the day-to-day trading. You must ignore it and stick to your analysis. What are waves telling you? Well, the market is bullish: then go long.
An X-Wave for the AUDUSD Pair
Still, on March, we were growing bearish the AUDUSD pair. Not that it was any news for our subscribers: after all, we were expecting this for some time now.
2017 started with a bang for the pair. A triangle as an x-wave is a powerful pattern, only that it needed more time. The almost vertical move, while looking impulsive, it was corrective. Again, a leg of a contracting triangle.
The plan was to sell above 0.77, but one is a plan, and something else is the execution. Nevertheless, the idea was valid, only that it rose faster than it fell. Of course it did!
Contracting Triangles in an Elliott Chart
Three examples, three different pairs, the same pattern: a contracting triangle. What makes it so common and how to trade such a wave pattern?
They are the favorite way for the price to consolidate. Think of a situation when you expect a range to form. How about the Asian session? A typical one is dead, volatility wise. That is a triangle forming.
Contracting triangles are more common than expanding ones. In fact, I would say more than ninety percent of the times the triangles contract.
Draw the b-d Trend Line
A triangle is as good as the price stays below or above the b-d trend line. That is, in a bullish or bearish market. The moment this trend line gives way, a new wave pattern starts. What's next may be impulsive or corrective, and this calls for a retest of the trend line in many situations.
An Elliott wave blog that mentions a Forex chart deals with triangles. Like it or not, they are everywhere. The biggest mistake in interpreting what is a wave is to look at lower time frames.
If you do that, as a trader, and find a triangle that works, apply the same thing on bigger time frames. If it worked on the hourly, it MUST work on the monthly too.
A profitable Elliott wave trader sets rules in place and respects them. The b-d trend line must be broken only under specific rules. Mostly, those rules deal with time, but not only. They are part of a trader's Forex education, and, believe it or not, the market respects them.
Mind the Apex
The apex of a triangle offers important information. It may even lead to support and resistance prices. An Elliott wave trader can use it together with time.
You see, triangles like these have an important characteristic. They'll either be a continuation or a reversal pattern. Again, the key stays with the b-d trend line and how price evolves within the two trend lines.
Only Corrective Waves
Perhaps the most important characteristic in a triangle is that only corrective waves appear. No exception.
The funny thing is that Elliott categorized corrective waves as "three-wave" structures. Yet, a triangle has five: a-b-c-d-e. Again, all of them corrective, part of the Elliott waves theory.
Let me tells you a little trick regarding these triangles and Elliott wave in general: whenever you see a wave chart or wave pattern labeled with letters, that's a corrective wave. Moreover, if you see either letter, d or e, that's a triangle. Anyone saying different has no idea how to trade Forex with Elliott waves.
April 2017 - Fundamental Analysis Influence Wave Patterns
It was supposed to be a difficult month for the Euro. Considering the most volatile pair is the EURUSD, a volatility drop there should influence the whole market. And it did.
For days, the market barely moved. The Easter week even brought twenty-something pips as a daily range. Deadly for a Forex trader that lives from volatility and moves derived from it.
Yet, it was only a pattern. Or, more exactly, a corrective pattern. When trading Forex, keep in mind one thing: the market always opens the next day or the next Monday. It will do that with or without you.
To make sure you'll still be there to trade, knowing yourself is key. Can you handle the pressure? The pressure of doing nothing?
Sitting on your hands when trading for a living is painful. You feel the need to do something only because the market is open. This, in turn, leads to overtrading, and overtrading leads to the account disappearing overnight.
The Next Federal Reserve Meeting
The FOMC (Federal Open Market Committee) statement was in focus this April. Chances for the Fed to hike rates again in June were slim. Yet, after the release, they jumped to almost ninety percent.
Please remember an Elliott wave trader needs fundamental analysis besides the technical one, only for having an idea when the market will move. This was such an event. If technical analysis gives us the target for a trade, there must be a fundamental reason for it. A so-called driver.
It turned out no one took any chances, despite the message being clear. French elections dominated risk exposure on the Forex market. As such, the whole month was rather dull. Even the ECB (European Central Bank) meeting didn't bring enough action on the Forex charts. An Elliott wave trader needs to have patience for a wave pattern to unfold.
The Le Pen Risk
The biggest fear the market had didn't materialize: the radical Le Pen, while entering the second round, was unlikely to win. All that market consolidation ahead of the event reversed with a vengeance: risk-on dominated the major pairs, with the Euro in focus.
Gaps were all over the place, many of them still open. The market was relieved. This doesn't happen all the time, though. For the ones that don't remember, please see the market reaction after Trump's election.
Avoid Risks at all Costs
This is a very powerful statement part of any Elliott wave trader's strategy. Or, at least, it should be. How do you avoid being trapped on a fundamental risk? Well, that depends on the currency pair.
If you trade a dollar pair ahead of a U.S. Dollar news, you might want to avoid that by trading a cross pair. That is, a currency pair that doesn't have the dollar in its componence.
How about trading commodity currencies in a month dominated by political risks? It's a way of avoiding risks.
And so I did, at least partially. The USDCAD is in a more than a year consolidation pattern. To the surprise of many, it is not a triangle, but the b-wave of a flat.
The pattern is quite old and interesting: it follows a triple zigzag and keeps a slow-rising channel. Its problem is, again, the time frame. What would have been the best strategy in the last year? Buy the dip and close your eyes.
According to Elliott, the b-wave MUST retrace 61.8%. As simple as that. If the a-wave is, indeed, a triple zigzag, an Elliott wave trader simply buys the dip and looks for the golden ratio.
What can go wrong? Many things. Our first approach was in March, buying the dip caused by the Fed's hike. Pretty strange the U.S. Dollar sold aggressively after a rate hike from the Fed...but what the hell, who am I to judge? I'm a technical trader, so I bought the dip.
Being too Early Doesn't Make it Wrong
It was too early. In fact, after going long, the market went in my favor for a while, only to drift lower again. Did anything change from a technical point of view? Definitely not. Still, it needed more time.
In Aril, I was all over it. The whole move from 1.32 to almost 1.36 was a blast. I loved it. CPFX subscribers too.
But the inability to break above 61.8% raises questions. When counting waves with the Elliott Waves theory, one should not count current prices. Never.
The thing to do is to let the previous pattern dictate the target and the stop-loss for the current price. We can only speculate about what is a wave that comes: impulsive or corrective. But a Forex chart can change overnight.
These days, trading is not what it used to be. Not anymore. A few decades ago, robots followed humans. This changed by the time HFT (High-Frequency Trading) started to control the market. All these quick swings are the result of robots or trading algorithms. They buy or sell thousands of trades per second. We, as traders, can only adapt.
2017 1st quarter saw us adding 9.26% in profits. It was a difficult quarter, but not that difficult. We could have done better.
The market expected so much from the new Trump's cabinet that traders went over themselves. I'm not saying Trump's administration won't deliver on its tax reform plan. I'm only saying that it seems to take quite some time. The recent political turmoil in the White House shows how difficult the transition is.
Monetary policy in the 1st quarter was priced in. Neither the ECB (European Central Bank) nor the FED surprised markets. Yes, we had a rate hike from the Fed, but it was so well communicated that by the time it came the market didn't care anymore. It's the result of forward guidance.
To sum up, and Elliott Wave trader needs many qualities. Patience and discipline come first. Knowledge is only second. Guts to pull the trigger is third. Last but not least, putting in the screen hours end up in successful trading.
Come and join us: www.capitalpropertiesfx.com/subscription - technical analysis at its best. Or come learn from us: www.capitalpropertiesfx.com/private-mentoring. Either way, you're not alone. Years of experience are here to guide you.
Capital Properties FX
May 20, 2017
Financial Crisis Inquiry Commission, July 15, 2008 - Scott Alvarez, "Re: Lehman Good Bank/Bad Bank idea discussed last night", e-mail message to Kieran Fallon
"I just think it's more complicated" - Mervin King press conference, Quarterly Inflation Report, February 10, 2010