Home—Online trading—Spread betting explained—Spread betting blog—The euro resumes its decline
Oct 10, 2012, 12:20
Posted byJohn C Burford
Gazing at my trading screen this morning, I am spoiled for choice as to today’s topic. Many of the tramlines I have been working with in many markets were violated yesterday in large sell-offs – and I will cover these later this week and next.
But I believe the euro offers some terrific examples of how my methods can help identify excellent trade entries… and the exits can wait!
Anyone studying the currency markets will quickly learn that when a long-term trend gets going, it is like the Duracell bunny - it keeps going on and on and on.
We are in a well-established down trend in the EUR/USD. That much is clear from just a glance at the weekly chart. So the only sensible medium-to-long-term stance is to trade from the short side.
That is not to say there will not be large counter-trend rallies, as we have seen recently. But I believe the safest and surest way to make profits and avoid losses is to trade with the larger trend, especially in currencies.
But one of the biggest problems is deciding when a rally is likely to run out of steam and a low-risk short trade can be entered.
As you know, I like to use Fibonacci in identifying likely reversal zones – and recent action in the euro has been a solid case in point.
Here is the hourly chart:
(Click on the chart for a larger version)
The market low at 1.28 on 1 October was followed by a sharp rally – just when the market was heavily bearish. In other words, speculators large and small had amassed a huge net short position.
As we all know by now, this is exactly what it takes to lay the ground for a short squeeze of some size. More on this point later…
Trader tip: Keep an eye on sentiment and COT data for signs of extremes of imbalance, especially today when extremes exist in many of the major markets. I wrote of the imbalance in gold yesterday.
I have drawn the A-B-C wave pattern to this rally. The A wave overshot the Fibonacci 38% level, then retreated to wave B – which was in the region of the 23% level, please note – and rallied strongly to the 62% level (green arrow).
The 62% retrace is an excellent place to look for a short entry, and that would have been a good trade.
But the market is full of surprises. It fooled me by extending the rally to the Fibonacci 76% level, and perhaps stopping this trade out.
Trade tip: I know many traders have great difficulty when stopped out in getting back in, but that was the correct strategy, particularly when you see a negative momentum divergence at the high (see red arrows on next chart if you cannot spot it).
So now the market is heading back down, where are the likely areas of support? At the tramlines, of course. Here is the chart:
When the market made its Friday high, I could draw in my upper tramline, and gratifyingly, it has a solid prior pivot point (PPP).
My second tramline drew itself (the centre one here), despite the first touch-point being in an overshoot. This is typical behaviour after a sharp down move.
Claim your FREE report: The six-step game-plan for
spread betting profits
Yesterday the market crashed through this centre line, and another short entry was presented.
This morning the market is jiggling around my third tramline, which not coincidentally is the Fibonacci 76% retrace of the October rally! Why not check for yourself?
With this support, I expect at least some degree of bounce. But if not forthcoming, new lows beckon below 1.28.
To check on the big picture – always a good policy – here is the daily chart showing my tramlines:
The Friday rally carried right to the Fibonacci 76% retrace! Another great reason to look for a short there.
With the centre tramline break, my first minor target is the meeting of the Fibonacci 38% level and the lowest tramline.
That would be a sensible place for short-term traders to look to take profits.
And on an even larger scale:
I have my very long-term tramlines with the upper one drawn off last June’s 1.50 high. We hit it again mid-September (red arrow).
Very long-term, a sensible target would be the lower tramline in the 1.10-1.20 area.
And to wrap up, if you are trading currencies, this chart should be on your wall, preferably taking up most of it:
(Chart courtesy elliottwave.com. Click on the chart for a larger version)
As I discussed at the workshops last week, sentiment is what ultimately drives all markets – and there is no finer proof of this than in the chart.
Note that the major market turns coincide with sentiment extremes.
Take time to study it. I hope you will be convinced that the currency markets (speculators) are dangerously lop-sided against the US dollar with only 7% bulls and a near-record short futures position.
I was amazed to see the recent vertical rise from massively net short to massively net long currencies vs the dollar. I hope you are too.
Of course, the hedge funds have bought into the story that the Fed, through its 'QE infinity' (and beyond?) pledge, will destroy the dollar’s value and rampant inflation will result.
But hedge fund managers are nothing if not bandwagon-jumpers. If they see a market rallying, they will justify their buying with rational analysis. If they see a market falling, they will come up with equally sensible and opposite reasons. Provided, of course, that their colleagues are doing the same!
With one eye on their bonuses, they talk their book and less sophisticated traders take all this seriously. Big mistake!
Do your own analysis from the mass of data freely available. Use simple charting methods such as those I am showing you. And you will stand every chance of becoming an ace trader.
• 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.
Published in Spread betting blog
More articles by John C Burford
By John C Burford, May 22, 2013
By John C Burford, May 20, 2013
By John C Burford, May 15, 2013
By John C Burford, May 13, 2013
Leave a comment
(10 October 2012, 09:12PM)
Complain about this comment
As a committed - but passive (ie not trading but charting and recording the trades I would make)- I have the greatest respect for the trading methods outlined in these emails and in the videos. They really work and I get a lot of fun following the markets.I wonder if there will ever be a video regarding the "wealth of information" sourcesto help with market sentiment analysis.
(12 October 2012, 09:39AM)
Complain about this comment
I'm slightly bemused by your tram placements on the long-term chart John. I have your bottom one on my chart, but your upper tram is my 4th tram, as I have my 3rd one touching at the start of May high (with 2nd tram in between). On that basis my chart shows a tram break upwards at the start of Sept. Is this not a bullish sign?
This will be the name displayed with your comment.
This helps us verify comments are genuine. It will not be displayed anywhere on the site and is stored confidentially.
Please keep your comment within 1,000 characters and relevant to the main topic. We encourage healthy debate, but we don't allow insults or bad language. Anything off topic or unpleasant, we'll remove. Enjoy the conversation! Thank you.
To prevent spam-related comments please enter the characters shown in the 'Captcha' box to the left.
Enter the text from the box above
Remember my details
By leaving a comment you accept our terms and conditions.
The trades on this blog are all 'closed', past trades. These aren't trades for you to copy, they are there to teach you some useful trading tactics for your own spread betting. And always remember: spread betting carries a high risk to your capital as you can lose more than your original stake.
Cut through the trading jargon with MoneyWeek's easy to understand guide to spread betting terms
In his easy-to-understand video tutorials, John C Burford outlines some of the essential concepts you need to know to become a successful spread better
22 May 13
20 May 13
15 May 13
Compare the leading providers' online trading accounts for spread betting, forex trading, share dealing and CFDs, and open an account online. Plus, get MoneyWeek's tips and advice on trading online.
Copyright © MoneyWeek 1999-2013. All rights reserved.
Registered office: 8th Floor, Friars Bridge Court, 41-45 Blackfriars Road, London SE1 8NZ.Registered in England with company no. 04016750 and VAT no. GB 629 7287 94. MoneyWeek and Money Morning are registered trade marks.