Elliott Wave EUR/USD: Trading Methodology

The price action on the EUR/USD pair this week has shown sideways price action, trading between 1.3339 and 1.3507 in a consolidation phase, which when complete, will continue with the bearish trend move. Technical analysis gives us tools to understand the market behavior, and Elliott Wave analysis, when applied, increases the probability of success and defines the risk while boosting the trader’s confidence level.

Applying Elliott Wave theory to the 4 hour chart, we highlight the waves”i”and ii” in black, where wave “i” started at 1.3832 and ended at 1.3296, with a move of 536 pips and 59 4 hour candles. This swing ended the day with the latest employment report in the United States, and also managed to break the bullish trend line highlighted in black. Usually when a support or resistance is traversed by the price, a few candles later price returns to that level and tries to cross it; this is called a “pull back”. Breaking a significant level consists of three parts: first when the candle body closes below the trend line; second is the “pull back”, when price revisits the trend line; and third is the Japanese candlestick pattern at the end of this “pull back”. This three part configuration and process produces a high probability trade setup.

Adding Elliott Wave to this forecast, it appears that the “pull back” is labelled as “ii” wave black, and this is a corrective continuation structure. To establish its possible end, three steps are used: first use the Fibonacci tool and estimate retracement levels; second, understand the internal waves inside wave “ii” black; and third, find the possible convergences among the levels. The result of this analysis shows that the 50% Fibonacci retracement for the wave “ii” black is very close to the trend line at 1.3564, and this level also corresponds to the previous wave “4” red circled; therefore, we have convergence of three objectives for the end of the wave “ii” black. In practical terms this means that after wave “ii” black, comes wave “iii” black with a conservative target at 1.3003, a level which corresponds to 100% of wave “i” black.

When you find a trade set up like this one, and apply your personal trading strategy, which tells you where, when and how to open and close a trade, it increases the probability of success to close to 85%. By removing the human emotion with an objective approach, this increases the confidence in the trade. We hope that with this report you have more clarity about the future of the EURO and will use this methodology of analysis to find your trades and be successful. Happy weekend.

Elliott Wave EUR/USD 4 Hour Chart


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