Let us have a look at an interesting situation on the Gbp/Aud pair.
The daily chart has the makings of a possible bearish Elliot wave.

As we can see, wave2 was a sharp correction to 78.6 of wave1, and it was a classic 3 wave corrective pattern.
So far, we seem to have completed the wave3 and we can expect a pullback/correction towards the upside for a wave4.
Now, price may still continue towards the down side, thus negating the Elliot wave, but we seem to have a couple of factors pointing to a possible upside correction.
The stochastic indicator has been showing a bullish regular divergence, which indicates an upside move.
We seem to looking a possible bearish Butterfly pattern in the making within the corrective wave4.
So, if the low of EW3 holds, then we can expect some moves to the upside to complete the wave4.
We can estimate the possible levels of resistance of this up move as-
a.) The reversal level “D” of the harmonic pattern.
b.) As per the rules of the Elliot wave, the wave4 should never go into the territory of wave2; hence this could also act as a resistance level. (The red line shown in the chart)

Let us have a detailed look at the harmonic pattern – the bearish butterfly

The point B has formed precisely at the 78.6 of X-A and we are looking for some more down moves to form the point ‘C’.
If price does find support at a fib level (at ‘C’) then we can expect a rally to complete the wave ‘C-D’….which should support the wave4 of the Elliot wave.
Thus the target of this bearish butterfly would be the Fib projection 127.2 of A-D…..which would be the wave5 of the Elliot wave.

When we have 2 different factors pointing to a similar setup, then it becomes a high probability trade.
But again, coming back to our ‘Mantra”.
We don’t assume anything and we don’t predict anything. We wait for price to confirm.
So, if the low of EW3 (the point A of the harmonic pattern) holds, then we can expect a corrective move up – the Elliot wave4 and subsequently the wave5.
If price breaks this low, then it becomes a bearish 123 pattern (as shown in the chart) and we can estimate the targets of this bearish move.
Sunil.
“Act….don’t React”

A Wolfe wave is a reversal pattern and a very successful one at that. It is basically a 5 point structure, and like the other 5 point pattern – the harmonic pattern – It is precisely defined, very specific in structure and gives excellent Risk-to-Reward ratios.

We had a look at a Wolfe wave setup in a previous post – http://blogs.fxstreet.com/forexology/2009/03/15/wolfe-waves/
and  am enclosing 2 Wolfe waves that we traded in our live trading room.
The rules remain the same – (for a bearish Wolfe wave)
1.) Once the points 1, 2 & 3 have been identified, we wait for the point 4 of the pattern to confirm to the conditions.
2.) Once point 4 forms, we can expect price to rally up for a last thrust to point 5, which usually forms at the Fib projection 127.2 / 161.8 (of 3-4)
Thus one can trade this up move with confidence as the price objectives are precisely set.
3.) Once price finds resistance at this fib level, thus completing the last leg of the pattern, we can expect price to change trend to the downside with great momentum.
For the price objective of this down move, we plot a line from the high of point 1 to the low of point 4.
Price will often come down to meet this line which becomes a very precise target.

One can simply reverse the rules for a bullish pattern and as we can see, this pattern is quite accurate

Sunil.

I am enclosing a current scenario on the Daily time frame of Gold.
Please bear with me, if it sounds confusing, as mixing 2 patterns is not easy. But I intend to prove the “Trade management” part….again, and this seems to be a perfect example in the making.
We have seen that Gold respects the Fib ratios quite precisely and hence we can trade some excellent harmonic patterns on it.
Wee are looking at a confluence of 2 different harmonic patterns, which would give us a high probability move.
But once again, we are not here to predict the price movement, but to simply follow it.
Hence we keep our levels fixed and wait for price to confirm, before we enter a trade.
One must remain flexible since the market will seldom move the way we expect it to.

1.) We have a Bullish Gartley pattern in the making (the blue one)
Price seems to have found support on the “C” point of this pattern and if this support holds, then one can expect price to rally to complete the wave C-D…expected price objective  - 980.00 (appr.)
2.) We have a second bearish Gartley pattern within it (the green one)
In this one, price seems to have found support on the “B” point of this pattern and if this support holds, then one can expect price to rally to complete the wave B-C…expected price objective  - 945.00 (appr.)
Conclusion – Looking at the confluence of these 2 patterns, a price rally to 945.00 (appr) is a very high probability trade.
So, my trading bias would be towards a long trade.
One would wait for price to confirm the support at the present level, and only on a confirmation of some bullish momentum, we could think about longs to 944…and maybe 980.
If this support does not hold, then price could continue to the downside….and we are not in a trade. We have only lost the analysis time, but our capital is intact.
Then we look for more opportunities and once again, wait for price to confirm.
Sunil.

Having a disciplined approach to the markets simply means having a precise trading plan and following the plan to the ‘T’.
Now as a trader, one must remain flexible since the market will not always move the way we expect it to. This becomes contradictory & hence turns into a point of confusion.
Being flexible does not mean that one must abandon the discipline, but one must adapt one’s self to the changed situation.
Let’s take an example of an expected harmonic pattern which did not complete, and see how we must remain flexible.
I will go over the unfolding of the situation step by step to make things clearer –

Step.1 – We had a price retracement at the precise 61.8 fib level (B retraced to 61.8 of X-A) which indicated that we have a strong possibility of a bullish Gartley pattern forming.
(Please refer to previous posts for identifying and classifying the different harmonic patterns)
At this stage, this price formation can also be considered as a bullish 1-2-3 pattern.
Step.2 - As traders, we are looking for trades with high probability and we don’t predict the price action. We set down our alternatives and follow price.
Since price found support at a precise fib levels (the 61.8 of ‘X-A’), we can expect a rally to the upside.
Alternative.1 – We can expect an up-move to form the bullish Gartley pattern, and expect price to find resistance at point ‘C’ of the pattern…and give another move down.
We consider the 78.6 Fib retracement level (of A-B) as an important level & so long as price remains below this level, we can expect a down move
Alternative.2 – Price could continue with the uptrend to fulfill the price objectives of the bullish 1-2-3 pattern.
Conclusion – The probability of price rallying to the 78.6 Fib level (of A-B) is very high & one would enter a long trade till this level….at least.

As we can see, price rallied past the 78.6 Fib level (of A-B), which negated the Gartley pattern. Hence one would expect price to continue with the up moves and fulfill the price objectives of the bullish 1-2-3 pattern.

Every different situation demands an appropriate Fib ratio and we always use the Fib Expansions to determine the price objectives of a 1-2-3 pattern.

And price found resistance precisely at the FE 100 level.

Hence one would have managed the trade to get some nice long moves, simply by being flexible as per the situation.
One can call this the “If-Then” approach.
If price does this, then I would do that & if price does that, then I would do this.
But again, this “If-Then” situation has to have precise rules set down, which enable us to manage the trade to its logical conclusion.
Sunil.

Let us have a look at a different pattern, other than the regular harmonic patterns that we follow.
This is a pattern which we trade quite successfully in our trading room and like the harmonic pattern; it is precisely defined, very specific in structure and gives excellent Risk-to-Reward ratios.
The Wolfe wave is a reversal pattern, which forms a 5 point wave structure. It has a very simple 3 step identification process and one can trade within the legs of this pattern…often quite accurately.
I am enclosing an ideal bearish Wolfe wave on the Cad/Jpy.

As we can see, it is very specific in terms of Fibonacci ratios.
1.) Once the points 1, 2 & 3 have been identified, we wait for the point 4 of the pattern to confirm to the conditions.
2.) Once point 4 forms, we can expect price to rally up for a last thrust to point 5, which usually forms at the Fib projection 127.2 / 161.8 (of 3-4)
Thus one can trade this up move with confidence as the price objectives are precisely set.
3.) Once price finds resistance at this fib level, thus completing the last leg of the pattern, we can expect price to change trend to the downside with great momentum.
For the price objective of this down move, we plot a line from the high of point 1 to the low of point 4.
Price will often come down to meet this line which becomes a very precise target.
Sunil.

It has always been my endeavor to make the traders aware of the “other factors” involved in trading.
I would call these factors of “Money Management factor”; “Mind factor”; “Trade management factor” as “Other” factors, since most traders are not even aware of the importance of these….unfortunately.
With this in mind, we had planned a special topic for the ‘Free access open day’ held on Fxstreet on Thursday 26th Feb.
Unfortunately, due to technical reasons we could not complete the entire session.
Hence I am planning to repeat this same topic on the free webinar that we regularly have on Mondays on FxStreet.
http://www.fxstreet.com/live/sessions/session.aspx?id=09153e3c-e3cc-4584-9a20-852e76567d6d
Hence this will be the new topic on Monday 2nd March (10.00 GMT)

Technical analysis is NOT the trading plan.
Use the tools of technical analysis as a path to manage your trades.
A Trading Plan is often the thin line between success and failure in the markets.
Not having a plan simply means that the trader is entering market blindfolded. The Trading Plan must incorporate the 3M’s (Money, Mind & method…in that order).
In this webinar, we will attempt to use “Method” to enable us to prepare an effective trading plan.

It would be great to see everyone there.
Sunil.

Hello everyone,

We had recorded a webinar which we conducted on FxStreet on the “Flag pattern”.

The recording is available for download in the ‘Transcripts’ section of FxStreet, along with thye PDF of the lesson -

http://transcripts.fxstreet.com/2009/02/the-flag-chart-pattern.html

Sunil.

Hello everyone. I have been out of the cyber space in the last 2 weeks due to technical issues.

The hard disk of my laptop crashed….in short my life crashed -:). Then my back up PC had some technical issues and in addition, we had a major breakdown with the internet server.

Whew…all at one time -:((

I managed to recover over 80% of my data, and am in the process of organising things again. But I could not post anything here, as I had lost my login links and of course, was completely out of touch with the markets.

We are back on track now and we will start with the harmonics once again.

Sunil.

This is with reference to a question, on how to calculate the price objectives of the “Butterfly” pattern. Following up from the previous post

http://blogs.fxstreet.com/forexology/2009/02/08/a-harmonic-pattern-at-the-time-of-nfp-data/

we can see that price movement has gone in the anticipated direction…so far.

The harmonic patterns have very specific price objectives, but as a trader one must manage the trade to lock in profits at every step.

Hence we maintain the correct technical levels leading to the ultimate price objective…just in case price decides to go against us.

The following chart shows the 3 price objectives, calculated from the reversal level “D”. These should be used to manage the trade efficiently.

Target.1 - The measured move distance of wave “B-C”.

(This has been clearly explained in the previous post  http://blogs.fxstreet.com/forexology/2009/02/08/technical-analysis-is-a-path-to-enable-us-to-reach-our-goal/ )

Target.2 - The fib projection 78.6 of wave “A-D”

Target.2 - The fib projection 127.2 / 161.8 of wave “A-D”…which is the ultimate target of a harmonic pattern.

Once again, one can never be completely sure of achieving all the targets. As traders, we are here to make money & I would keep taking profits when the market gives it….and yet remain in the trade for further moves.

After all, that is what trade management is all about.

Sunil.

Trading the NFP data, or for that matter any important fundamental new release, is not something I do…and definitely not something that I would recommend.
I believe some traders swear by it, but I look at it as something of a gamble, as there are too many odds stacked against you.
And If I want to gamble, I would rather go to a casino -:))
Anyway, it’s just a personal opinion & let’s get down to the subject at hand.
I was looking at the USD/JPY on the 4hr, where a harmonic pattern was under way and the price movement, post-NFP pushed it to the required fib level.
Now again let me clarify, that this was not traded.
I wanted to put this as another example of how price respects technical levels….fib levels, previous support/resistance levels, pivot levels, and even dynamic trend line levels.
Basically I want to infer 2 points from this example -
1.) Whatever is the reason that causes price to move (the NFP data in this case), we can estimate the extent of the move. Now doesn’t that give you an edge??
2.) Price action always gives you clues & you do not need indicators. Now this does not mean that one should not use indicators, but always use them as a secondary factor…rather than a leading requirement. If only one can take the efforts to study the price structure…and understand the logic behind the forming of chart patterns…one will be ahead of the pack.

So, let’s get down to the trade.
I was looking at a bearish Butterfly pattern, where the first 3 waves had formed at the correct fib levels.

As we can see, the wave B-C had formed at the fib 61.8 and it was time for the NFP data on the first Friday of the month.
It would have been “make or break” for the pattern & there was no way that one could estimate that price would complete the last wave C-D….which it did.
Once again, the point here is that the sharp moves due to the NFP data, found resistance precisely at the Fib levels of “D” -
(a)    The 127.2 % fib projection of wave “X-A”
AND
(b) The 161.8 fib projection of wave “B-C”

Now, tell me that Fibs don’t work -:)))

Now this completes the bearish Butterfly and one would expect price to change trend to the downside, to fulfill the price targets of this harmonic pattern.

But, repeating my Mantra once again.
We never assume anything & wait for price to confirm.
There are certain rules and conditions for a proper entry into a harmonic pattern & we wait for these conditions to fulfill.
The beginning of the new week could bring some surprises & new moves, so we wait.
Once again, I wanted to show this setup, as an example of how price respects fib levels…regardless of the circumstances that cause the price movement.
Sunil.