Price action is never random and if you take the trouble and efforts to understand the chart patterns & simple levels of support/resistance, you can definitely get that “Edge” in your trading.

Let us have a look at the Usd/Cad chart of 1hr, where we had price giving us a definite structure. Understanding these structures gives us the anticipated moves of the subsequent price action.
Again, one must use these tools to follow price and not to predict the price. Hence our “Edge” is the fact that we can plan our trades in advance….before the crowd.

1.) Pattern.1 - Elliot wave.
Let’s start with the bearish Elliot wave. As we can see in the chart, this down trend formed a nice 5 wave impulsive pattern.

Now looking back at the chart and identifying any pattern is very easy, but trading the “hard right edge” of the chart is a different ball game.
It’s not easy to analyze the price action when we don’t know how the next bar is going to form.
So, let’s keep it practical and accept that we had identified this bearish Elliot wave, after it completed. Simply put, we did not trade this bearish move, since we did not identify the wave when it was forming.
But knowing that this is an Elliot wave, also gives us some clues for the subsequent price action.
Let’s first confirm the basic rules of the Elliot wave -

1.    We can clearly identify a 5 wave pattern with 3 impulsive waves and 2 corrective waves.
2.    Wave.3 is the largest of all the impulsive waves.
3.    Impulsive waves 1 & 5 are similar in structure.
4.    The rule of alternates is followed in the corrective waves - If wave.2 is a sharp and strong retracement, then wave.4 is a shallow & consolidating retracement.
5.    Wave.4 should never go into the territory of wave.1
6.    The corrective wave.4 usually forms with a hidden divergence and the last impulsive wave.5 usually forms with a regular divergence.

With all these conditions being satisfied, we can assume that this was an Elliot wave. Hence we can estimate the further price movement, since the rules of the Elliot wave say that there should be an ABC correction after the completion of the 5 waves.
This ABC move usually retraces to 50% (minimum) of the entire Elliot wave, and we now have an estimated direction & an expected target.

2.) Pattern.2 - Divergence.
Let’s go the next chart pattern, the bullish divergence.

The target objective of a divergence is usually the fib projection 127.2/ 161.8 of D2-D3. As we can see in the chart, the 127.2 fib level coincides with the previous target of the ABC correction.
Hence we can designate this area to be a potential target zone and we would have a very high probability of price reaching this level.

3.) Pattern.3 - Harmonic pattern.
After price completes the previous 2 patterns of the Elliot wave & the divergence, we have a bounce from the support zone and a subsequent harmonic pattern - a bullish Gartley.

Let’s have a look at this pattern on a smaller time frame

We can see that this pattern formed with precise fib levels and hence we have a strong probability of price fulfilling the expected bullish objectives.
The price objectives of a Gartley pattern are usually the fib projection of 127.2 / 161.8 of A-D.

As we can see that the 161.8 fib projection is pretty close to the targets of the earlier patterns. Hence we can now identify a high probability target zone.

The combination of all these patterns has given us a potential target zone and this becomes very important.
Knowing when to exit the trade is probably more essential than the entry itself, and one can mange the trade and the risk properly.

To add to the fun, let me throw in one more harmonic pattern -J
We can identify a bearish butterfly also, which seems to have completed.

Let’s have a look at this pattern on a smaller time frame.

Again, this one seems to have completed with precise fib ratios, and hence we can expect the bearish price objectives to be met.
Supporting a bearish move is the fact that price seems to be losing momentum as the stochastic indicator is not confirming the last highs of price. (As seen in the previous chart)
So, we could be looking at a possible bearish divergence.

As an example of managing a trade based on this knowledge, we have possible bearish moves and price is quite close to our bullish target zone.
At this stage, one would probably take most profits from the bullish trade, and yet leave something running…in case price still manages to get to the target zone.

As they say - Well prepared is half done.
Sunil.

Let’s follow up on the previous harmonic pattern that we had identified on the 4hr time frame of Gold.
This is the bullish Gartley pattern that had completed & we were expecting price to rally to fulfill the price objective of this pattern.

As we can see, price did fulfill the objective of this pattern.

At this stage price seems to be in a consolidation stage and we are not sure about the direction its going to take.
As always, let me repeat myself.
We are traders and not astrologers. We do not predict price movement, but use our analysis tools to set certain levels.
And follow the “If-Then” principle. We allow price to make its moves & follow it.
The advantage is that our trade parameters are pre-defined, hence giving us a “Plan”

Looking at the daily time frame, this up move (which fulfilled the price target of the 4hr bullish Gartley) has given rise to some other harmonic patterns -
Alternative.1 - We could be looking at a possible bearish Gartley in the making….IF price finds resistance at “B” (the 61.8% of X-A)

In that case, we can expect price to form the third wave B-C of the harmonic pattern. If we concern ourselves with only this move, then we have a definite price objective to the downside.

Alternative. 2 -
We could also be looking at a bearish Bat pattern, where the last wave C-D has yet to be completed.

So, if price breaks the 61.8 level (of X-A) then we can expect moves to the ‘D’ level of this pattern.
Conclusion -
We don’t know if price will move up or down, but we have defined our levels and will follow price. The advantage of using harmonic patterns is that price seems to respect the Fib levels quite precisely and we can expect a high probability that these objectives would be met.
And if they do, then we can also plan further moves, since we have the next wave already defined.
Sunil.

Hello everyone,
This is an article which I came across on one of the forums & requested permission to put it up on my blog.
I feel that this explains the basic factors of what makes the market move.
As I often mention while discussing the harmonic patterns - “what is the reason for these patterns to form?”
The prices movement actually takes place by the emotions of the traders. Now these emotions may be caused by various factors, be it some fundamental reasons of economic unbalance, or non performance of a currency, or the strengthening of another currency…it does not matter.
What matters is that different traders look at the situation is different ways, which is reflected on the market price.

The typical inexperienced member of the trading “herd” enters the market, or his position, at point A.
This is a trader who cannot stand the notion that he might be left out of an ongoing rally.
At this point the experienced traders start to cash in on their profits and the rally quickly starts running out of steam.
When the price declines to the point where our trader cannot take any more pain he gets out at point B, just before price finally hits its bottom.
If for some reason he didn’t exit at point B, he will most likely exit at point C being happy to recover some of his losses.
This is exactly the kind of “herd” trader that successful traders prey upon.

Let’s take this one step further -
If price manages to break the high of point A, then the underlying emotion changes to the bullish side & everyone and his brother will begin to buy…expecting the price to go further.
This adds fuel to the fire and this price wave gets extra momentum, thus making it a large price rally.
Now, isn’t this the wave 1-2-3 of an Elliot wave?
So, can we quantify our emotions on a mathematical graph? It looks like we can.
And this is exactly what technical analysis does.
Sunil.

We have had a couple of previous harmonic patterns on Gold, and somehow Gold seems to follow the Fib levels quite regularly & precisely.
As of now, we are looking at a bullish Gartley pattern which seems to have completed and one would expect price to rally to the upside.

But before we analyze this pattern, let us look back on some previous patterns.
Looking at the daily time frame, we initially had a bearish Gartley pattern which started forming in the month of March’08.

The pattern formed with precise waves, and subsequently fulfilled its target objectives too, quite accurately.
Subsequently, price rallied from this support level, found resistance at the fib retracement level of 78.6% and formed a bearish divergence in the process.
Thus this level became a strong resistance zone & we could have expected price to change trend to the downside.

As we mentioned, Gold seems to follow the fib levels quite accurately & we could have estimated the expected support area of this downtrend.

And as we can see, price found support at precisely the 127.2 Fib projections.

This brings us back to the existing bullish Harmonic pattern.
Since we have a bounce of a strong Fib support level, the probability of this pattern fulfilling becomes higher. And looking at the previous harmonic patterns, one would expect price to follow the fib levels.

Price has bounced from the support zone at “D” and in the process, has also broken some previous levels of support/resistance. (As shown by the blue horizontal line on the chart)
Hence one would assume bullish momentum and expect price to rally to the target objectives.

Repeating the basis of “Forexology”. There are no guarentees in trading and what has worked previously, may not work again. Its only the risk management & a proper trade management which will ensure success.

Sunil.

Just thought I would mention the press release of the traffic results of Fxstreet.
FXstreet.com experienced its best traffic results ever in October 2008, and hearty congratulations to it.
It’s not surprising, since FxStreet has created a reputation for being THE One-stop shop for forex trading on the web, and you deserve it.
Way to go, FxStreet, and three cheers.
Once again, it’s a pleasure being part of such a wonderful team.
Sunil

After the ITC, I conducted my own workshop in “University of Barcelona”, which was another great event. It was a day long workshop, which was attended by a small group of traders. It was highly interactive and we covered a range of topics right from the basics to advanced techniques. I am quite certain that it benefited the traders who attended it.
One of the participants, (Carlo from Dublin) recorded the complete workshop & I will soon be putting it up on my website.
And I would like to make a special mention for one my subscribers from Barcelona (Carlos Jove Santisteban) without whose help, this workshop would not have been possible. He took a lot of efforts to see that things were organized properly, and thank you very much, Carlos.
Some more comments on Barcelona.
I cannot just get over it, as I fell completely in love with the city.
After 4 days of trading forex, I took a break and spent another 2 days exploring the city.
Its one of the most beautiful cities in the world and I had a grand time.
I visited the Fxstreet office, and now I can put a face to the Emails that we receive from the staff -J
I honestly feel that with the Fxstreet staff and my friend Carlos, I have a second home in Barcelona.
Just give me the slightest excuse and I will come back.
FxStreet…are you listening -J
Sunil.

Hello everyone,
This is my first post since I got back from the ITC at Barcelona.
I have been plagued with technical issues since then & have hardly been able to check the markets.
But before we go into the technicals, first things first.
The ITC at Barcelona was an event par excellence & I feel very proud to have been a part of it. In my opinion, it was one of the best events on trading that I have ever attended and participated & I give full credit to everyone at FxStreet for it.
It was superbly organized and coordinated with finesse, which made it one of the memorable events of the year.
It was great to interact with the other speakers, all of whom are very successful in their own field and it was an experience to come across traders from all over the globe.
I made a lot of friends, both personally & professionally and I have come back a wiser man-J
One thing which made the conference unique was the concept of live trading. The 3 days of live trading were very intense for everyone and I believe it was here that the traders learnt a lot.
Once again, full credit to the FxStreet staff, to each and everyone & a special note for the technical team….who worked round the clock to ensure that everything went smoothly.
Lastly, all these nice words will be incomplete, without mentioning 2 points -
First, at the conclusion of ITC, we had the round table where the traders asked the speakers certain questions about the trading style, trading tips etc.
Regarding the trading tips, each and everyone of the speakers (including your truly -J) talked about money management. Nobody offered trading tips on buy/sell, technical analysis etc. It was only money management & rules.
Which only goes to show, that the 3M’s that I talk about in this “forexology” is an important part of trading…Ha.
Secondly, if we had such events regularly, I am sure more traders would achieve success and gain tremendously from such events.
More power to FxStreet, and may we have more of such events.
Sunil.