We are lucky enough to have trading oriented discussions here so let me show you, guys, how a real Wawe Principle based trading plan looks like.
1.: Analyzing the price chart: do we see a pattern we recognise?
The Wave Principle provides context for the price action, allowing us to identify the move up from the 1.1302 low. Our best guess is an ABC corrective rally. Its third section, the advance from 1.1353 seems to be a diagonal as the (c) wave of an (a)(b)(c) structure. It has many overlapping waves - corrective wave patterns - indicating
we may see the last wave of a countertrend ABC rally within the larger downtrend (or the first wave of a larger advance forming a huge diagonal later, who knows). Beyond that
we have serious divergences in momentum, so looks worth to start evaluating a trading plan.
2.: What to look for if it is an ABC ZigZag correction?
The slope of wave C in an ABC rally always shallower than the slope of wave A. Do we see a shallower wave C slope? Yes, we do.
It demonstrates a decrease in momentum. This behaviour is so common that they are almost a qualifying characteristic of this pattern.
Furthermore,
wave C in an ABC correction usually travels the distance of A. In our case both ABCs' poject the same price target around 1.1507.
3. Can we draw a price channel that serves as a highway for trending prices?
Yes,
we can draw price channels for both the larger pink (a)(b)(c) and a smaller for the small impulse wave forming red circle C. We know that corrective price move tends to stay between the parallel boundaries of the channel reaching its peak around the upper boundary of that channel.
What if it breaks the upper boundary of either channels? It's OK, that would indicate that prices may advancing higher - or much higher. Remeber what I said yesterday:
the only thing that can confirm an idea is price action. Until it occurs, even the best looking scenario, no matter how probable, may not turn out to be the correct one.
So, sounds good enough to start formulating a trading plan? Since we have enough information, yes, we can start seriously considering a trade.
The plan
The trading technique for a zigZag is to enter on a break below the extreme of wave (iv) of 5. This conservative approach
prevents picking tops or bottoms without sufficient evidence and requires the market to take out a prior swing low to act as initial evidence that the impulse wave is finished. Set the initial protective stop at the extreme of the price move - two pips above the extreme of (c).
A move below 1.1431 would confirm the termination of red circle C and would be a strong evidence that the green impulse wave that began at 1.1431
most likely had ended at 1.1507 (or nearby levels, may have topped already).
If the next wave down proved to be an impulsive decline, then I would see prices fall below 1.1353 in a short period of time. However, if the upcoming decline still proved to be a correction, then it would most likely be shallower and take more time finding its bottom possibly above 1.1354. Both would result in a profitable trade.
Hope this helps for those who tries to apply the WP on real life trading.Thats how it is different to gambling.
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