Low Risk, High Reward Trading Experiment

Wednesday February 21 at 4:30 ET

My last comment was "A short opportunity may therefore present itself on a rise to about 236.00 with a completed wave structure." The recent high is 236.16. This may be the fulfilment of this prediction. However, a conservative interpretation of the wave pattern indicates the possibility of one more pulse upwards to 236.60.

Trade Experiment #348 Sell GBP/JPY at 236.60

Stop is 237.15

Target is 234.00

Risk is 64 pips

Reward is 251 pips

RRR is 3.9 to 1

Confidence level: good
Accuracy: fair
Reward / Risk Ratio : fair

For research purposes only.

Wave hypothesis : Wave 4 down - not the best trade. Trading Wave 5 up will be a better trade set-up.

Progress report: GBP/JPY fell from the recent high at 236.16 to 235.48, at which time the BOE interest rate decision sent GBP/USD tumbling, which pulled GBP/JPY down to 235.17. There is still a chance that a strong bounce of GBP/USD coupled with a continued rise of USD/JPY can lift GBP/JPY to the entry price of our trade experiment, though this chance is diminished by the impact of the BOE announcement.

Today 04:29am
*(UK) BOE VOTED TO KEEP RATES UNCHANGED AT 5.25%: 7 VS 2 VOTE

- Beasley, Sentance voted for rate hike
- BOE minority said that they put particular weight on upside inflation risks
- BOE minority noted that companies are willing to increase prices

Result: GBP/USD abandoned its chance of doing a proper fifth wave up on the latest upwards pulse and plunged down about 50 pips.

Prediction: GBP/USD will fall to 1.9480 - 1.9500, which is Wave 1 down, then bounce up strongly to about 1.9550.

What happened: GBP/USD fell to 1.9486 as predicted, then bounced up 61 pips to 1.9547 as predicted.

What might have happened: There might not have been the same response of the market to the BOE interest rate announcement, and GBP/USD might have completed a minor fifth wave up to about 1.9590 or above, if even a failed one, in which case we would have been able to enter a short position and capture the move from the top down to about 1.9500, which is about 100 pips. However, this wouldn't have been a low risk / high reward trade opportunity according to my 5:1 RRR criteria.

Wednesday February 21

Tentative JPY BOJ Governor Fukui Speaks
2:45 EUR French CPI m/m -0.3% -0.2% 0.2%
4:00 EUR Current Account 2.3B -1.2B 0.9Br
4:30 GBP BOE Meeting Minutes http://www.forexfactory.com/images/m...mpact_high.gif 7-2 8-1 5-4
6:00 GBP CBI Industrial Trends Orders 4 -8 -9
8:30 USD CPI m/m http://www.forexfactory.com/images/m...act_medium.gif 0.2% 0.2% 0.5%
8:30 USD Core CPI m/m http://www.forexfactory.com/images/m...mpact_high.gif 0.3% 0.2% 0.2%
8:30 CAD Retail Sales m/m 2.3% 1.0% 0.2%
8:30 CAD Core Retail Sales m/m 2.0% 0.7% 0.1%
10:00 USD Leading Index m/m 0.1% 0.2% 0.3%
13:00 USD Fed Governor Kohn Speaks
14:00 USD FOMC Meeting Minutes http://www.forexfactory.com/images/m...mpact_high.gif
15:30 USD San Fran Fed President Yellen Speaks
18:00 AUD Leading Index m/m 0.2%
18:50 JPY Trade Balance (p) 0.4T 0.7T 1.1T

Underlying inflation pressures in the US rose by more than anticipated in January, as the core inflation rate, which does not include volatile food and energy prices, increased at its fastest pace in more than half a year, the Labor Department said today.

Overall prices rose 0.2 pct, twice as fast as the 0.1 pct increase economists had expected. Core prices rose 0.3 pct in January, slightly faster than the expected gain of 0.2 pct and the largest gain since June.

A deeper look at today’s US data indicates that the rise in core prices was driven by higher medical costs and tobacco prices. Leading indicators fell short of expectations for the month of January, but the sharp upward revision in December offset any negative implications.

Yesterday, the Bank of Japan’s decision to raise interest rates gave little support to the Yen in light of the dovish comments from BoJ Governor Fukui following the decision. The USD/JPY has risen 200 pips since February 16th, correcting from a long drop preceding that. Cautious comments from the Bank of Japan reinforced the market’s belief that despite the increase, interest rates will remain low and any further rate hikes will be delivered gradually. The Bank of Japan will likely repeat what they did back in July of 2006, which is to give the market at least 4 to 6 months to absorb the latest rate increase before tightening policy again. As an export dependent nation, Japan does not want to see a rapidly appreciating Yen and they especially do not want to trigger massive carry trade liquidation. At 0.50 percent, Japan still offers the lowest yield in the developed world, which is keeping the Yen an attractive funding currency for carry trades.

The GBP remained under pressure as the minutes from the most recent BoE meeting suggests that the central bank will need more time to assess data before tightening rates again. The CBI industrial trends survey was the only piece of UK data released today. The index surged from -9 to 4 in the month of January, suggesting a recovery in manufacturing.

Carry trades are back in play after the BoJ signaled that further rate hikes will be slow and gradual. The EUR has become one of the preferred carry trade currencies to earn interest on because of the ECB's plans to raise interest rates next month.

The Commodity Currencies are stronger across the board - with gold prices up $21 an ounce to a 9 month high and oil prices back above $60 a barrel on news of refinery shutdowns. The CAD staged the strongest rally - up 135 pips since February 20th -- thanks to its solid retail sales figures for the month of December. Holiday spending proved to be exceptionally strong which is another piece of evidence that the Canadian economy is improving. The recent string of positive reports has driven the CAD to a 6 week high against the US dollar. The AUD is also performing well thanks to the hawkish comments from RBA Governor Stevens last night. He was optimistic about growth - saying that rates were more likely to rise than fall. His comments were reinforced by the stronger fourth quarter wage data and leading indicator reports released last night. AUD/USD has risen about 200 pips since February 12.

Whats the cable direction for today?

Itme, do you see a complition of that down move to about 1.9400/9350 or there about before reversing for the last wave up ? I'd like to see if I'm on the same ?

Thanks

Down, up, then down, then after that - up.

Hi JimboFX. Yes, what you say is possible about GBP/USD, if this is Wave 5 down of Wave C down of WAVE 4 down. However, it may be Wave 2 down of WAVE 5 up, in which case it may reverse at about 1.9450 - 1.9475 and start heading up again. One could risk a buy at this area ( 1.9450 -1.9475 ) if there is a clear low risk entry opportunity, then adjust the stop to break even. Otherwise, the safe strategy is to wait for the fall to 1.9400 or lower area before going long again.

What happened: Apparently my second scenario occurred. GBP/USD descended to 1.9460 ( 1.9450 -1.9475 ) and then rose strongly to 1.9598. This adds credence to the theory that the last downward move was Wave 2 down of WAVE 5 up.

Looking at the charts, it seems to me that USD/CAD, USD/CHF and USD/JPY are all likely to move up more to continue retracing their recent downtrends. Then they will continue down. Actually, USD/JPY has been engaged in an uptrend, so it will continue up. But the other two have been trending downwards lately, so after this extra last upwards pulse they should resume their down trend.

[ In fact, USD/JPY did continue to rise another 45 pips on a steady ladder, as predicted. ]

[ Also as predicted, USD/CHF rose another 50 pips to complete its A-B-C retracement pattern and then reversed its temporary uptrend, resuming its larger downtrend, and fell 65 pips to 1.2370. ]

USD/CAD may retrace to 1.1640 or higher before resuming its strong downtrend.

[In fact USD/CAD rose to 1.1632 before resuming its downtrend, descending to a new low at 1.1592. ]

I suspect EUR/USD and GBP/USD will be going down over the next 24 hours before resuming their uptrends.

[In fact GBP/USD went down 70 pips before reversing strongly, and rising 140 pips to 1.9600. EUR/USD fell 55 pips before reversing and rising 60 pips to 1.3140. ]

AUD/USD looks like it will hit the top of its expanded Wave 3 at about .7930, after which it will undergo a sizeable correction down to about .7880. Then it will carry on up to the top of its trend at about .7975 - .8025.

[ In fact, for some reason AUD/USD failed to complete what looked to me like a required fifth wave of an expanded third wave, at about .7930, but instead fell to .7873. ]

CHF/JPY seems to be heading for a trend peak at about 100.00, or a bit lower. It's current price is 97.60 . This suggests that USD/JPY will continue to rise, while USD/CHF may continue to fall. There will be a good short opportunity at the top.

[ In fact CHF/JPY rose to 98.11 so far. As predicted, USD/JPY rose while USD/CHF fell. ]

About one year ago, when I used to read DailyFX.com and the technical analysis offered by FXCM.com, REFCO.com, and other large brokerage firms and forex portals, there was never any reference to Elliott Wave analysis. Nine months ago, when I first surveyed the content of Forexfactory.com, there was virtually no reference in any thread to Elliott Wave analysis.

Now, less than a year later, Elliott Wave analysis has become a dominant method of technical analysis on almost all the major portals and brokerage firm sites. Several of the most popular trading journals on ForexFactory.com rely heavily on Elliott Wave analysis. Elliott Wave analysis has made a sudden and unexpected resurgence into the forex culture, precisely at the time that I was starting to place it into more prominent attention on this site, and my colleague / mentor was stunning the brokerage community with his unparalleled trading acument. Also, the success of Phincorp alerted many astute analysts to the path that market clarity and trading competency might have to follow.

For example, look at this very intensive analysis of the recent topping phenomenon of the USD/CAD on DailyFX.com. Everything covered here is exactly what I was thinking when USD/CAD was topping recently. Nothing of this kind was ever found on these sites one year ago, or even 6 months ago:

Is This a USDCAD Major Top? Take a Look at Our Top/Bottom Thermometer...

Wednesday, 21 February 2007 14:20:44 GMT

Written by Terri Belkas, Currency Analyst

We wrote on 02/07 that “USD/CAD has been sitting at its 1 year high for the past week leading many traders to wonder if this is a major top in the making. Our Trend Reversal Thermometer currently puts the chances of a top at 70%. The Elliott Wave structures at multiple degrees suggest that the USDCAD is nearing a major top. There is a good chance that the pair will make one more high (above 1.1870) to complete an ending diagonal. 1.1886 is a measured objective for the terminus of the rally from 1.1028 (and ultimately 1.0927). A break below 1.1646 signals the resumption of the long term downtrend.”

Last week we said, “The 5th wave of the c wave is unfolding as an ending diagonal. If this interpretation is correct, then price should exceed 1.1870 once more before turning lower for good. The decline that followed the top at 1.1879 has unfolded in 5 waves (red roman numerals). This small degree 5 wave decline is just the first in what will be a 5 wave bearish sequence that will likely take the USDCAD to below 1.0927.”

The small wave 2 corrective advance we saw completed yesterday has given way to major declines from the 38.2% fibo of 1.1879-1.1620 at 1.1719. Additionally, risk reversals have entered an extreme level, which has boosted our thermometer reading. As we have said before, wave 3’s are usually the most powerful waves and can take price a long way in a short period of time, so get ready!....

More, with detailed charts, here:

http://www.dailyfx.com/story/special...071346719.html

HEy itme
I am interesed in learing more about the EW theory. I laready read the link you provided and am in the process of buying Elliott Wave Principle: Key to Market Behavior by Robert Prechter. Is there any other possible links or books you can suggest that will help me beef up my knowledge and skills on EWT. Also, can you suggest some good indicators to use with the EWT


thank you in advance for you assistance

These are good questions, but I don't have the answers. My approach is primarily empirical, being a scientist by training. But I have heard that Mastering Elliot Wave: Presenting the Neely Method: The First Scientific, Objective Approach to Market Forecasting with the Elliott Wave Theory (version 2) by Glenn Neely, and Eric Hall is very good.

Someone told me that ELWave is good software. Elliottician has just analysed all the patterns in the forex since the dawn of the market, and has software to count waves and project trends that seems to be useful for an informed user. I must caution you that Elliott Wave theory is not apparently for everyone, and it is important to balance it out with common sense, general knowledge of fundamentals, and possibly other approaches to make sure that you don't get sucked into a quicksand of Elliott Wave fantasies. Subscribing to a good consultancy service like Phincorp or Elliott Wave International would be highly advisable until you get your bearings.

This trade experiment failed on two counts. The wave count and concept were correct, but the details didn't work out. This highlights the problem with trying to trade corrective waves. Firstly, the entry price was not met, and secondly, neither was the target. The price of USD/CAD didn't quite make it down to the entry price, falling 3 pips short. Also, the price didn't rise all the way to the target price of 1.1770, making it only to 1.1715. This confirms what was said in my comment to the trade - trading a corrective wave is much riskier than trading with the strong trend. Strong trends are particularly risky to trade against, as frequently the corrective waves are very shallow, so the targets may not be hit, and the reward / risk ratios are inferior.
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Previous trade experiment:

Thursday February 15 at 18:00 ET

Trade Experiment #346 Buy USD/CAD at 1.1616
Stop is 1.1588
Target is 117.70
Risk is 33 pips
Reward is 149 pips
RRR is 4.5 to 1
Confidence level: fair
Accuracy: good
Reward / Risk Ratio : excellent

For research purposes only.

Wave hypothesis : The first wave down is now finished. We will have a corrective upwards Wave 2 now. This is not an optimal trade. It will be much better to trade the third wave down from the top of the Second Wave.

Just now 4:30 GBP Business Investment q/q http://www.forexfactory.com/images/m...act_medium.gif 3.3% 1.3% 3.1%

caused a 27 pip jump up of GBP/USD, forming a largish Wave c of Wave 4, to a maximum so far of 1.9517. Now should follow a downwards Wave 5 to a new low at about 1.9450.

What actually happened: According to my wave hypothesis, the Wave 5 down to complete the A-B-C corrective downwards trend was severely truncated. The larger order upwards trend swept the price movement upwards strongly, and only allowed the Wave 5 to descend as far as 1.9486. Either that, or the downwards corrective trend was already finished at the previous low of 1.9460, which is also a viable wave count, and the uptrend triggered by the above positive GBP news was the beginning of a strong higher order Third Wave up.

hi itme, i got a question. can a post-triangle thrust measurement an A-B-C-D-E in a wave-2?

for your theory, cable would go downwards the A-B-C-D-E trianlge, from 13.02.07-dato, would fit the wave-4, dont you think? (i know it´s not completed yet)

anyway is it possible? (the triangle to be in wave-2)

I don't fully comprehend your question, and am no expert in triangles. However, wave 2's are usually zigzags. But that doesn't mean that they can't be flats or triangles. What Elliottician found by pattern analysis of the equities, commodities and Forex markets is that the Second Waves are of longer duration usually in the Forex market. This may account for the longer time spent in range bound markets by the Forex market.

GBP/USD has been quite rangebound since February 15, in what is apparently the tail end of a large downwards corrective wave and beginning of a new major upwards impulsive wave. The higher lows and higher highs indicate a small upwards bias in the pattern. I personally don't count A-B-C-D-E, but stick to the structure which I have shown before, and will add here again.

thanks itme, yeah that A-B-C-D-E-count was a mistake. the last tale of this wave-4 is hard to analyse.

well, i just need some more experience.

I am from Slovakia and you thread is so better i am educate yours EW system.Sorrry from my english lettering.You are the best.
I am winnig of your threads for three days 1580 pips.
Thank you.

Hi mistas. Your english writing is not too bad. But your trading is outstanding. How on earth did you make so many pips in three days? Do you mean 30 days? Or do you mean 158 pips? Anyways, you are obviously very talented. Remember always to employ stops, in case you are wrong one day!

Generally, these following statements that I made on February 15 turned out to be true, with the one exception of the one concerning EUR/JPY. EUR/JPY didn't reverse at the suggested price level, but kept on trending downwards another 100 pips, as the complete 5 wave pattern we detected was but Wave 1 of a larger Wave C downtrend. Then it reversed and climbed 300 pips. Presumably, mista avoided going long on EUR/JPY, at least not at the wrong time, but instead traded GBP/JPY upwards to make so many pips, perhaps with several lots? GBP/JPY climbed almost 600 pips.

Would you provide more details of your trades the last few days, mista?

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Previous predictions / comments:

USD/JPY is at 119.16. It is very near to the bottom of its recent 122.08 to 119.16 -- 292 pip drop. It is due for a correction, not reversal of trend direction.

USD/CAD is at 1.1625. It is very near to the bottom of its recent 1.1875 to 1.1620 -- 250 pip drop. It is due for a correction, not reversal of trend direction.

USD/CHF is at 1.2340. It is very near to the bottom of its recent 1.2550 to 1.2330 -- 220 pip drop. Upwards target us about 1.2450. After the Wave 4 upwards correction we foresee a fall to 1.2280.

GBP/JPY is at 232.66. It is very near to the bottom of its recent 238.89 to 232.66 -- 623 pip drop.

EUR/JPY is at 156.64. It is very near to the bottom of its recent 158.75 to 156.64 -- 211 pip drop.

Nuggets of Wisdom from Jesse Livermore, Greatest Trader Ever

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In the early part of the 20th century, Jesse Livermore was the most successful (and most feared) stock trader on Wall Street. He called the stock market crash of 1907 and once made $3 million in a single day. In 1929, Livermore went short several stocks and made $100 million. He was blamed for the stock market crash that year, and solidified his nickname, "The Boy Plunger." Livermore was also a successful commodities trader.

I think the most valuable knowledge one can gain regarding trading and markets comes from studying market history, and studying the methods of successful traders of the past. Jesse Livermore and Richard Wyckoff are two of the most famous and successful traders of the first half of the 20th century. Many of the most successful traders of today have patterned their trading styles after those of the great traders of the past.

Here are some valuable nuggets I have gleaned from the book, "How to Trade Stocks," by Jesse Livermore, with added material from Richard Smitten. It's published by Traders Press and is available at Amazon.com. Most of the nuggets below are direct quotes from Livermore, himself.

1. "All through time, people have basically acted and reacted the same way in the market as a result of: greed, fear, ignorance, and hope. That is why the numerical (technical) formations and patterns recur on a constant basis."
2. "The game of speculation is the most uniformly fascinating game in the world. But it is not a game for the stupid, the mentally lazy, the person of inferior emotional balance, or the get-rich-quick adventurer. They will die poor."
3. Don't take action with a trade until the market, itself, confirms your opinion. Being a little late in a trade is insurance that your opinion is correct. In other words, don't be an impatient trader.
4. Livermore's money made in speculation came from "commitments in a stock or commodity showing a profit right from the start." Don't hang on to a losing position for very long."It is foolhardy to make a second trade, if your first trade shows you a loss. Never average losses. Let this thought be written indelibly upon your mind."
5. "Remember this: When you are doing nothing, those speculators who feel they must trade day in and day out, are laying the foundation for your next venture. You will reap benefits from their mistakes."
6. "When a margin call reaches you, close your account. Never meet a margin call. You are on the wrong side of a market. Why send good money after bad? Keep that good money for another day."
7. Livermore coined what he called "Pivotal Points" in a market or a stock. Basically, they were: (1) Price levels at which the stock or market reversed course previously--in other words, previous major tops or bottoms; and (2) psychological price levels such as 50 or 100, 200, etc. He would buy a stock or commodity that saw a price breakout above the Pivotal Point, and sell a stock or commodity that saw a price breakout below a Pivotal Point.
8. "Successful traders always follow the line of least resistance. Follow the trend. The trend is your friend."
9. A prudent speculator never argues with the tape. Markets are never wrong-- opinions often are.
10. Few people succeed in the market because they have no patience. They have a strong desire to get rich quickly.
11. "I absolutely believe that price movement patterns are being repeated. They are recurring patterns that appear over and over, with slight variations. This is because markets are driven by humans -- and human nature never changes."
12. When you make a trade, "you should have a clear target where to sell if the market moves against you. And you must obey your rules! Never sustain a loss of more than 10% of your capital. Losses are twice as expensive to make up. I always established a stop before making a trade."
13. "I am fully aware that of the millions of people who speculate in the markets, few people spend full time involved in the art of speculation. Yet, as far as I'm concerned it is a full-time job -- perhaps even more than a job. Perhaps it is a vocation, where many are called but few are singled out for success."
14. "The big money is made by the sittin' and the waitin' -- not the thinking. Wait until all the factors are in your favor before making the trade."......

By Jim Wyckoff

www.jimwyckoff.com

Reposted from the "Articles" section of FactoryForex.com

Thank you I needed that post today =)