We use a range of cookies to give you the best possible browsing experience. By continuing to use this website, you agree to our use of cookies.
You can learn more about our cookie policy here, or by following the link at the bottom of any page on our site.

0

Notifications

Notifications below are based on filters which can be adjusted via Economic and Webinar Calendar pages.

Live Webinar

Live Webinar Events

0

Economic Calendar

Economic Calendar Events

0
Free Trading Guides
EUR/USD
Bullish
Low
High
of clients are net long.
of clients are net short.
Long Short

Note: Low and High figures are for the trading day.

Data provided by
Oil - US Crude
Mixed
Low
High
of clients are net long.
of clients are net short.
Long Short

Note: Low and High figures are for the trading day.

Data provided by
Wall Street
Bullish
Low
High
of clients are net long.
of clients are net short.
Long Short

Note: Low and High figures are for the trading day.

Data provided by
Gold
Mixed
Low
High
of clients are net long.
of clients are net short.
Long Short

Note: Low and High figures are for the trading day.

Data provided by
GBP/USD
Bullish
USD/JPY
Mixed
Low
High
of clients are net long.
of clients are net short.
Long Short

Note: Low and High figures are for the trading day.

Data provided by
More View more
Real Time News
  • After a miraculous recovery in Q2, equity markets will be left juggling the Fed’s policy and the threat of a second covid wave, all in an election year. Evidently, traders will have their hands full in Q3. Read our equity forecast here: https://t.co/JARqbOKIeM https://t.co/Ms6zEucjqg
  • Hey traders! I'm sure you've all heard about trend trading. Sharpen your knowledge here: https://t.co/jkliL5sxj7 https://t.co/uvlv1MCAHI
  • $GBPUSD posts impressive Q2 recovery, however, what upside challenges lie ahead in Q3? Download our #GBP trading guide to find out: https://t.co/ZE0yjc6wdQ https://t.co/bFa90VJYor
  • RT @DailyFX: What’s the outlook for gold, USD, and the US economy? Jim Rogers shares his thoughts with @DailyFX only on "Trading Global Mar…
  • Forex Update: As of 20:00, these are your best and worst performers based on the London trading schedule: 🇳🇿NZD: 0.37% 🇦🇺AUD: 0.22% 🇬🇧GBP: 0.18% 🇪🇺EUR: 0.09% 🇨🇭CHF: 0.00% 🇯🇵JPY: -0.01% View the performance of all markets via https://www.dailyfx.com/forex-rates#currencies https://t.co/2faAkNNk8r
  • Texas virus cases increase 4.3%, above prior 4.2% 7-day average - BBG
  • Commodities Update: As of 20:00, these are your best and worst performers based on the London trading schedule: Silver: 0.56% Gold: -0.04% Oil - US Crude: -0.76% View the performance of all markets via https://www.dailyfx.com/forex-rates#commodities https://t.co/esKy1uY3rQ
  • IG Client Sentiment Update: Our data shows the vast majority of traders in Ripple are long at 97.06%, while traders in US 500 are at opposite extremes with 71.69%. See the summary chart below and full details and charts on DailyFX: https://www.dailyfx.com/sentiment https://t.co/HVIXApa0wb
  • The continuity seen across these volatility cycles is a good thing. Historical precedence offer a blueprint for identifying conditions supportive for a vol-event to occur, and how they may unfold. Deepen your knowledge of historical volatility here:https://t.co/vg7w10la3j https://t.co/Mit4oKK16l
  • Indices Update: As of 20:00, these are your best and worst performers based on the London trading schedule: Germany 30: 0.63% France 40: 0.62% FTSE 100: 0.55% US 500: 0.00% Wall Street: -0.00% View the performance of all markets via https://www.dailyfx.com/forex-rates#indices https://t.co/bW5YIX8sRH
Timing Forex Reversals with Equal Waves (Part 2)

Timing Forex Reversals with Equal Waves (Part 2)

2014-08-01 19:28:00
Jeremy Wagner, CEWA-M, Head of Education
Share:

Article Summary: The Fibonacci equal wave pattern provides us at least a 1-to-2 risk-to-reward ratio trading opportunity. Below, we provide two examples of how you can incorporate the equal wave pattern into your current forex strategy and technical analysis.

One of the things I love about the FX market is that there are many different ways to trade it. Some traders look for simple methods while others seek out more complex strategies. I have found that alternating equal waves is a good supplement to other forms of forex technical analysis.

Previously, we introduced the concept of alternating waves and the structure of what it looks like. However, just like when using Fibonacci retracement levels, there are many levels to focus on when measuring alternating waves which in the end can create confusion. To bring more confidence to your entries, focus on the one ratio which delivers alternating equal waves.

When applying the Fibonacci expansion tool to the FXCM Marketscope charts, the waves are equal at the 1.00 level. Let’s open the box on how we can use this level to anticipate price reversals so we can time entries into new positions.

Remember, the objective of the equal wave pattern is to anticipate where wave C might terminate. Therefore, we draw on the Marketscope charts using the Fibonacci expansion tool connecting the beginning of wave A to the end of wave A, then connecting the end of wave B. So while using the Marketscope charts Fibonacci expansion tool, it requires 3 points to draw the pattern.

GBPJPY Carves an Equal Wave Pattern

The GBPJPY has been trending to the upside, so let’s look to the equal wave pattern to time potential reversal zones to buy into this uptrend.

Learn Forex: Fibonacci and Price Channels

Timing Forex Reversals with Equal Waves (Part 2)

(Created using FXCM’s Marketscope 2.0 charts)

Notice in the above pattern for the GBPJPY how the equal wave relationship placed a support zone near 140.11. Incorporating other forex technical analysis we can see two additional points of support converging near the similar price zone.

The black price channel shows support near 139.82. Meanwhile, a previous swing low (green circle) occurred at 139.37. Therefore, with several different points of support all converging near the same price zone AND wave C equals the length of wave A in the same area I can feel confident in the approach of buying the pair in this support zone. If you would like additional levels of confirmation, then you can apply candlestick analysis or use an oscillator to time your entry. In essence, the equal wave pattern suggests levels where prices are likely to see a reaction and pivot.

Equal Wave and Elliott Wave Theory

For those who understand Elliott Wave theory, a simple A-B-C move where wave A equals the length of wave C may look familiar to you. A pattern where wave A equals the length of wave C implies it is a corrective move and the whole pattern is likely to be retraced. In the example above regarding the GBPJPY, prices eventually broke to new highs. So if a trader correctly bought in the support zone with a wide enough stop loss to absorb the market’s natural breathing, the potential for upside on the trade would have been a new swing high, nearly 400 pips away.

No Pattern is Perfect

You’ll notice in the GBPJPY chart above, prices did not stop at the equal wave length at 140.11. In reality, prices briefly penetrated lower before making the bounce higher. Patterns rarely play out in textbook fashion so don’t be confused if you never seem to find prices stopping exactly at the equal wave length. The equal wave pattern essentially helps you identify higher probability trades with good risk-to-reward ratios associated with them. Let’s look at another example on the NZDJPY.

Fibonacci Retracements and Fibonacci Expansions

A question we often get regarding the Fibonacci retracement levels is how do you know which fib line to trade?

[To learn more about the Fibonacci ratios and how to use them in partial retracements, register for this free Fibonacci course that will take about 20 minutes to complete.]

Well, if you practice measuring out equal waves, you can use the Fibonacci expansion tool to help focus on a particular retracement level.

Learn Forex: Converging Support with Fibonacci

Timing Forex Reversals with Equal Waves (Part 2)

(Created using FXCM’s Marketscope 2.0 charts)

In the NZDJPY above, notice how the equal waves level (the blue 1.00 line) is very close to the 50% Fibonacci retracement line (orange line). Additionally, this support zone is close to the support zone offered by the black price channel. So visually, we can see a cluster of support forming on the chart.

The last piece of confirmation with this trade includes how the CCI indicator is showing divergence. This simply means the momentum is losing steam as prices enter this support zone. Therefore, we have a trade set up incorporating several difference pieces of technical analysis.

Since this is an equal wave pattern, you’ll want to place your stop loss just below the swing low and target at a minimum a new swing high. In this case it would be risking about 75 pips for the potential reward of 300. It is not uncommon for this pattern to produce at least a 1-to-2 risk-to-reward ratio. (Learn more about risk to reward ratios and profitability in our Traits of Successful Traders research.)

Suggested Reading: How to Use Alternating Waves (Part 1)

---Written by Jeremy Wagner, Head Trading Instructor, DailyFX Education

Follow me on Google+ .

Follow me on Twitter at @JWagnerFXTrader.

To be added to Jeremy’s e-mail distribution list, click HERE and enter in your email information.

(To learn how to trade using CCI, register to take this free CCI course and at the end of the course, receive a Day Trading strategy that uses CCI.)

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

DISCLOSURES

News & Analysis at your fingertips.