Forex strategy and the honing your technical analysis skills are vital elements in developing your FX trading acumen. Understanding the technical picture of the forex market will allow more focus by elimating the noise your hear from analist which will equal more success trades and enhanced profit margins.
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Forex Swing Trading with Elliott Wave
Todd Judkins
One of my favorite forex trading strategies involves using the Elliott Wave to trade market swings. Elliott Wave theory is named after Ralph Nelson Elliott, who concluded that the markets moved in a repetitive pattern of waves.
Elliott attributed this action to the mass psychology of the market. Elliot Wave patterns follow a rhythm that the markets move up in a series of 3 waves and down in a series of 2 waves which form the base of the 5-wave pattern (the opposite is true in a downtrend).
Elliott Wave Counts
1. Short Covering Wave
2. Pullback
3. Institutional Buying Phase
4. Retracement
5. Retail Buying
I trade using Elliott Wave analysis quite frequently on options and sought to port that strategy to the forex market.
Just like in my option trading I look for the Elliott Oscillator to pull back between 90% and 140% of my wave-3 high to set up the trade. This pullback should correspond to a 38%-62% Fibonacci retracement from the wave-2 extension.
My next step is to look for confirming candle patterns, such as Harami, Tweezers or Harami cross, to trigger the trade. I draw a regression channel and look for a break above or below the channel as confirmation to enter the trade.
I place my stops at the high of the wave-1 advance and trail my stop aggressively once the currency pair has advanced past the wave-3 high. A 3-bar trailing stop is my usual exit strategy.
Look more into Elliott Wave and other strategies as a tool for increasing your forex swing trade opportunities.
Source:Profit Source
Taking Profits
So much time is spent on entering a trade. Today I want to focus on some exit strategies. This is not a full Fibonacci course, so if you don’t understand the basics I suggest that you visit my website for help with those aspects.
Human nature makes trading very challenging. Sometimes you want to exit a trade too quickly when it goes against you, and to cling on to a winner too long.
Too often a winning trade will reverse, taking back most of your profits, or even going into a loss. On the other hand if you exit too soon, you risk missing some big profits. You may find that you're sitting on the sidelines while the market continues well beyond your exit.
In this lesson I'll show you how to bank those profits before they turn against you.
First look at this FOREX chart (JPY hourly chart).
CHART 1.
Let's imagine that you were clever (or lucky) enough to enter long near point "A". You're feeling pretty good when price reaches "B".
So good that you don’t want to exit, because the up-thrust just before "B" give the impression that this market wants to go further.
Before you know it, the market reverses and heads towards "C". Right at "C" you get scared and bail out with a little profit. Not much profit compared to exiting at point "D" or even at "F".
You exit near "C", and feel relieved until you see the market heading (thrusting) up to point "D". You stop kicking yourself long enough to enter when it breaks above "B", just a little before the high at "D".
Soon after your entry near "D", the market retraces to "E", and on the way breaks below the high of "B". Breaking below the high of "B" feels scary because you're thinking this chart could be back at "A" in a flash.
So you exit at "E" licking your wounds with a loss in this trade.
You start to notice more frustration now, when you enter somewhere between "E" and "F". You're feeling good near "F", but then the chart dives to "G" and you're stunned! This is a losing day for your account, and it's beginning to hurt.
By this time you feel like the whole market is watching your trades and they're doing exactly the opposite of what you are doing.
You start thinking that they wait for you to enter before they slam you and empty your account.
You have wasted your emotional capital; you don’t want to trade any more. You don't have the stomach to consider shorting the rally after "G" to take profits at "H".
There must be a better way!
Banking those profits.
You should seriously consider using profit targets to improve your trading performance. There are several ways to do this, my preference is to use Fibonacci techniques.
On the following chart, I have added a Fibonacci expansion using points "A, B, C". This provides us with three profit targets. They are at 116.52, 116.93, and 117.59, see the blue arrows.
CHART 2.
If I add another Fibonacci expansion using points "C, D, E", then two more profit targets are added, at 116.87 and at 117.22. I have not added those studies to the chart, in order to keep things simple for now.
You will notice the 116.87 target is quite close to the profit target at 116.93 in the above paragraph. And the 117.22 target is remarkably close to the swing high at 117.32 which is between E and F.
We'll ignore those for simplicity; just remember that Fibonacci is excellent at predicting probable turning points.
The trick with Fibonacci is that the market sometimes blows right through a profit target. So what do you do then? Simple - you stay in the trade! But sometimes the market reverses shortly after a profit target.
Sometimes the market respects a certain Fibonacci level, sometimes not. Some Fibonacci levels are "stronger" than others. Advanced Fibonacci techniques are able to help determine which have more validity, but that is beyond the scope of this lesson.
What mechanism could you use to exit the trade?
One practical method of timing a trade is to use an oscillator. Another is to use a moving average. When an oscillator shows a decline of momentum, or when price crosses a moving average, you could exit the trade.
Let's explore the "oscillator" option in the following chart.
CHART 3.
In that chart, I have removed the Fibonacci studies (less clutter), leaving the blue arrows for profit targets. At the bottom I have added the default Stochastic per E*Signal charting software.
I have added a red vertical line whenever the Stochastic "fast" blue line crosses the "slow" red line just after price rises above the Fibonacci target. If you exited when price reached those vertical red lines, you'd be a happy trader!
Already you can see the potential of using profit targets with an exit trigger.
You may want to research the following:
- Possibly exiting a partial position at each profit target.
- Consider entering long again on the dips, when the chart begins to rally again.
- Consider using multiple time-frames, perhaps Fibonacci studies on the hourly chart, and exit triggers on 5 minute charts.
If you would like to become an expert at trading with Fibonacci, see my trading seminars at my website.
-Neal. Hughes FIB MASTER
Copyright, Neal Hughes, Hughes Trading International Inc, 2006 - http://www.fibmaster.com - Reproducible in entirety with full credit.
