2Bull Forex Blog

Elliot Wave is one of the most popular methods of trading and although originally devised for the stock market swing trading with Elliot wave is very popular with forex traders.

Let’s look at swing trading with Elliot Wave in more detail

Elliott Wave theory is named after Ralph Nelson Elliott, who concluded that the markets moved in a repetitive pattern of waves and was a reflection of human nature.

He attributed this action to the mass psychology of the market which never changes and can therefore be predicted with scientific accuracy.

Elliott Wave patterns follow a specific pattern that the markets move up in a series of 3 waves and then down in a series of 2 waves in a bull market. The 3 wave impulse and 2 wave corrective sequences form the basis of his method of a 5 Wave impulse pattern, with the reverse occurring in a bear market.

In Elliot wave theory there is also a use of the Fibonacci number sequence which is specific retracement levels to help calculate the waves.

So by trading these waves, a forex trader can look at his forex charts and swing trade with Elliot Wave and make consistent profits from his forex technical analysis.

It’s a scientific way of making profits according to Elliot waves and his disciples – so does it work?

The answer is it has to be one the biggest myths of forex trading that Elliot Wave Theory can lead you to currency trading success (lets ignore the fact that there is no hard evidence that Elliot made any money from his own theory) and look at why the theory is flawed.

1. If it’s a scientific theory:

It should be objective!

If human psychology can be predicted with scientific accuracy it should tell you exactly what to do, but of course it doesn’t – it leaves everything to your subjective judgment, so it can’t be a scientific theory – it’s a total contradiction in terms.

You have to look at the waves and decide what happens next - does that sound scientific to you?

2. Human Psychology is not scientific!

Of course it isn’t and neither are currency markets.

If there was a scientific theory that allowed people to predict prices in advance there would be no market- as we would all know the price beforehand.

Forex markets move on differences of opinions and these cannot be measured scientifically – This is common sense.

3. The Fibonacci Number sequence

This number sequence is loved by the far out investment community and was developed in the 12th century by Leonardo Fibonacci. It was NOT developed for the purposes of trading forex markets though - but was developed to solve a problem posed by the copulation of rabbits!

In fact I am sure if Leonardo Fibonacci was around today, he would be bemused by the way his theory is used by the believers of Elliot Wave.

So there you have it:

A scientific theory that is not scientific at all and is totally illogical.

There are many people selling the myth of swing trading with Elliot wave and how you can to but if it was as successful as they claim and they can predict the future, why would they be telling you?

It’s a good read but if you want to trade and use forex technical analysis to generate trading signals pass this one by and keep one fact in mind:

Trading is a game of trading the odds and not prediction.

You can win trading forex markets, however appreciate that you need to trade the odds to win and forget predicting the future.

If you understand this you can get a forex trading system that can make you a lot of money. Leave Forex trading with Elliot wave to the dreamers and deal with the reality which is:

There are no short cuts and prediction doesn’t work – work at trading the odds and you have a far greater chance of achieving currency trading success.

If you are a forex trader, you can either trade via fundamental analysis or technical analysis but which is best? Lets compare the advantages and disadvantages of each.

Fundamental Analysis

Currencies are affected by the fundamentals and these include:

The political situation, strength of the economy, government policy, the interest rate outlook to name just a few.

These are FACTS and the various participants look at them and decide which way prices should go.

The main advantage is:

The direction of the currency is normally in line with the long term fundamentals and this is reflected in currency trends lasting for months or years in line with economic and political cycles.

The main disadvantage is:

The people who look at the fundamentals are NOT making logical judgements they are influenced by the emotions of greed and fear.

We all have the same facts to look at but we all make subjective judgements on what the facts mean.

This means that price spikes are common and these don’t always reflect the fundamentals – Keep in mind it is humans as a collective group that decide price and they do NOT Conform to objective criteria.

To compound the problem we live in a world of instant communications, where the news is discounted in seconds and reflected in the price in a split second.

Now let’s look at technical analysis and why it is the best way for a trader should base his forex strategy upon it.

Forex Technical Analysis

Technical analysis contrary to belief, actually takes into account the fundamentals – it simply assumes that all fundamentals will show up in price action - but it does something more it takes into account the greed and fear of the participants, that motivate the individual participants.

A simple equation for this is:

Fundamentals + Investor Psychology = Price.

Forex technical analysis takes into account both inputs that make up price and they simply look at their forex charts and let them tell them where to execute their trading signals.

The advantages of forex technical analysis are:

It gives you the overall picture, is less time consuming, keeps your emotions out of trading and lets you trade the reality - without having to impose an opinion.

You trade the truth and that is the market price as you see it NOT what you think it should be.

The disadvantage is:

In the way that people use it – Most forex traders think they need to predict but that’s just guessing and hoping and you wont get far doing that!

Technical analysis will work, but only if you view it as a method to put the odds in your favour and act on confirmation of price changes.

For most traders a forex trading system based upon technical analysis is the best way to trade - you just need to be able to understand its advantages and limitations but that won’t stop you making a lot of money if you trade with the odds.

One final point:

They are completely separate forms of analysis and you should not mix the two – you are either a fundamental or technical trader. Our view is you should be the latter if you want to achieve currency trading success over the longer term.

We looked at the B Pound recently and gave you areas to sell if you did you made a huge profit with low risk and we have done separate report on the BP – here we want to look at the Yen and Euro and low risk /high reward trading scenario.

Lets look at these currencies and what the week ahead holds.

Japanese Yen

The trend against the dollar is down and has been for years - the recent rally is simply un-winding of carry trades.

This means the JY should resume its down trend and the recent volatility is presenting a low risk high reward opportunity. Take a look at a good free chart service such as futuresource.com and you will see for yourself.

Prices have spiked and are outside the top Bollinger band and resistance lies at 0.85.50 and 86.00. The key to looking at the short side is a change in price momentum.

Pull up the Relative Strength Index which has peaked at just above 70.00 and is losing momentum and also check the Stochastic which is set to cross with bearish divergence.

Look for a reversal day and momentum to turn bearish target on both indicators - target is the mid Bollinger band.

Euro

The euro is in a long term uptrend against the dollar and the recent correction (like the one we looked at in the British Pound) is simply the huge speculative long position being washed out and this looks to be almost done.

The key near term support is 1.36 (bottom of Bollinger band and July Lows)

Again you need to look at the RSI and stochastic and watch for a change in price momentum.

At present there is NO signal to buy RSI continues to fall and the stochastics are deeply oversold.

In Both Currencies

Do not try and predict WAIT for the confirmation on the charts backed up by price momentum.

Trade the reality of price - NOT your opinion (or the opinions of others) stay focused on the charts and stay disciplined.

There are of course conflicting news stories about what happens next - by focusing on the charts and trading the reality of a shift in price momentum, you will be trading the odds and that’s what any currency trader needs to do.

The long term trend is down in the Yen and up in the euro and while we could see a major trend change, this looks like a correction in both currencies and the longer term trends up in Euro and down in Yen will re assert themselves.

We gave a live short trade in the British Pound and it’s piled up big profits and our entry point was spot on (see previous articles) and we have banked a great profit but where will the pound go next?

Let’s take a look.

The British Pound set up was such a low risk high reward trade due the fact it was so overbought - a record extreme to the long side in the Net Traders Positions warned of the break and monthly multi year resistance was unlikely to be penetrated without a shakeout.

Were no self proclaimed experts and we could have been wrong - but common sense said the odds favoured the bears:

A record long position held by specs, and prices approaching multi year resistance and waning price momentum?

The break has of course occurred but where is the currency going next?

The Washout

The washout of spec longs is now taking place and it looks like the pound may have further to go on the downside.

We covered our shorts on Friday, with a tidy profit however our initial target of the mid Bollinger band has been met and were looking at re entering the long side.

The Longer Term Trend is Up

The longer term trend is up and once the speculators have taken their medicine, it will be time to look at the long side again.

Areas to watch are the lower Bollinger Band and the 1.9600 level.

At the moment there no indication to buy and you need to watch Price momentum

As with the short trade we did we will keep an eye on the stochastic and Relative Strength Index (RSI) these are great indicators and any trader should use them.

Look for a turn up in price Momentum above support to get back in on the longer term up trend.

As with the short trade we gave you WAIT for confirmation – DON’T assume anything get the signals first.

One lesson any trader should learn is NEVER try and predict we keep restating this as most traders can’t resist predicting – but if you do, you are relying on hope and will lose.

Trade the reality of price and you’re trading the truth and the odds and that’s the best you can do – but as you can see from our last trade that doesn’t stop you making a lot of money!

Anytime that you make a trade in the market, you need to know what you’re up against. Knowing the following seven points will not only help you in your trades, it will put you in the right frame of mind in order to be successful trader for the long term, which is what we all desire, and what really counts.

1. Don’t Throw Good Money After Bad - If you’ve got a losing stock, don’t make excuses or say things like “now it’s really become a bargain” or “it can only go up from here.” Those are famous last words. If you own an under performing stock, sell it - today! Don’t wait, and certainly do not add to your shares of that stock. That is a recipe for full-blown disaster. There’s a reason that the stock you own is under performing. That reason may not be obvious to you now, but eventually the reasons will come out. Your money can be put to much better use buying a stock that is in an uptrend and can make you money right now (see point #2).

2. Don’t Buy Low and Sell High - We’ve heard this phrase all of our lives: “buy low and sell high.” You can’t go wrong with that advice, right? Actually, that’s wrong, because buying low implies buying a stock that has been on a losing streak, or one that is under performing. Those are usually the worst kind of stocks to buy. The best stocks to buy are those that have firmly established a definite uptrend. So a more appropriate phrase might be, “buy high and sell higher.” Another piece of advice that goes along with this is as follows: don’t try to pick the bottom. Let someone else try to figure out what the bottom is. It could be that the stock has a few more weeks to go before it completely bottoms out. No use wasting your money guessing on where that point might be.

3. Don’t Swing for the Fences - Everyone wants to hit a home run once in a while, but making that your primary trading aim means you are risking your capital and your sanity. The only way to have long-term success in your trading career is by taking many small gains instead of a few big gains. Home runs are few and far between. They are a nice bonus when they happen, but don’t expect them every time. If a stock has made you some gains, take them. Don’t get greedy or expect a doubling or tripling in price, because you could end up losing what you have already gained, and sometimes a lot more. Take your profits, and move on to the next stock.

4. Know the Best Times of the Day to Trade - The best times of the trading day are the opening and the closing. More specifically, these times are the first hour and a half (9:30 to 11:00 am) and the last hour and a half (2:30 to 4:00 pm) that the stock market is open. That is when there is the most price movement and the highest volume. This is also why the opening and closing price quotes are used in mapping out stock charts. The volume around midday generally dies down quite a bit for one major reason: too many traders, especially the big institutional players (the ones who can noticeably move the market) are out to lunch. Some may take earlier lunches, and some may take later lunches, but there are always big players who have gone to lunch during this time. The people who they have left in charge are usually younger associates with less experience who don’t have much say in decision-making. So it’s best to avoid both buying and selling during this period of the day, as any price movements could be false signals or fake-outs.

5. Do Not Buy or Sell Before the Market Open - Buying or selling a stock before the open (8:00-9:30 am), in what is known as a pre-market trade, is usually not recommended. During the pre-market period, there is a considerable lack of volume. As a result, a few small traders can quickly bid up the price of a stock to a fever pitch. If you try to buy this stock during this time, it will usually come back down after the market opens. Conversely, if you try to sell a stock pre-market, often times you would have sold for a better price if you have waited a minute or two (or five) after the opening bell. Because of the lack of volume, along with a real dearth of institutional investors, it’s best to avoid pre-market trades altogether.

6. Sometimes No Trade is the Best Trade - When markets are falling and volatility is running rampant, staying “on the sidelines” in an all-cash position is often the best policy. Now it’s true that opportunities do arise when market volatility starts going crazy, but this is not the time to be a hero. Wait out the storm. When there is blood in the streets, stay out of the way of the stampeding masses. Once the market sorts itself out, and volatility dies down, it becomes safe to get back in the market. That is also why you should never feel bad about getting your stops hit (getting “stopped out” of a trade). Those stops, which often indicate small losses, save you from much bigger losses later on, bigger losses which can stop you from trading altogether. In fact, what may appear as a small loss at first, may actually be a “gain” in your favor; for example, if you sell a stock for a $1 loss, but the stock then continues to lose another $5, you should not consider that trade as a loss.

7. Is Paying for Advice Advisable? - If you are not getting the results you hoped for in your trading, should you get professional assistance? Being human beings, we are all susceptible to the ebb and flow of our emotional states. One of the hardest things to do is to disengage your emotions when trading, whether those emotions involve fear (when your stocks are falling) or greed (when your stocks are rising), or just the everyday emotions that stem from your personal life. If you can find a trusted and reliable stock-picking adviser, you are then able to bypass a lot of your own emotional baggage, and follow the lead of someone who is experienced in the discipline of trading. But be careful: Free advice is usually worth what you pay for it. However, you shouldn’t have to pay thousands of dollars, either. Also, be wary of stockbrokers who are trying to sell you a sure thing: usually, it’s stock that their company bought, and now must get rid of. Find someone who has a good track record, and is willing to back up their claims of success.