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Nzd/Usd Elliot wave setup

03/29/2012

I know, you folks read the title and probably thought “What??? Kosentrade is writing something about Elliott Wave? Now this should be interesting”

Well, it isn’t what you think. (or maybe for those of you who are frequent readers, it is what you think)

We’re going to look at a setup a few Elliott guys posted back in Feb about the Nzd/Usd. Now, I know one failed setup isn’t representative of an entire trading style. And I’ve mentioned several times in the past that these guys make money for their clients so that’s a good thing.

What I do want to go over is how important it is to be familiar and comfortable with your setup (or a trade you’re following). A new trader who sees a well argued setup may not understand all the downside risks. Elliott Wave setups are often expressed in this way. We have impulsive waves, corrective waves (with impulsive waves in lower degrees) and pseudoscience counting strategies. As with most trading styles, we can easily see things after they’ve happened, but it’s a lot harder to figure out what’s going on while the markets are moving.

Given an already played out move, I would think a trained monkey would be able to count a 5 wave move up and a three wave pullback, but doing that in real time is different. (Come to think of it, I know a lady who is a gorilla trainer, maybe I should print out some graphs and see if Bobo can count to five. Hey, if an octopus can predict the world cup…)

Of course you can make money trading with all this stuff if you want, but you can also make money using 10 moving averages, some stochastics, some MACD, and some RSI all cluttering up your screen.

On the other hand, you can take all that junk off your screen and you CAN make money simply reading the price action on the chart, looking at support and resistance zones and managing your trade. (Personally, I trade with some indicators cluttering up stuff so no offense one way or the other).

Lets look at a trade. This is a common setup I often see Elliott guys posting. We have a developed wave I, II and III. We’re looking for a trend continuation targeting an entry on a wave IV pullback. Confused already? It’s a wordy way of saying we’re gonna buy the dip.

Looks decent right?  Lets buy here ish, and target .8600.  Well, I don’t like this long at these levels at least on a longer term chart.  From a non elliott standpoint, I like trading off fib zones.  That wave iv pullback was barly a 23% retracement of wave iii.  Often, a .23 is decent for trading in a congestion zone, but in my experience, a deeper pullback to at least the .382 or .5 is a better place for a trend continuation.  But enough about that now.  I suppose buying here is a valid setup.

But where is our stop loss?  Right below the .23 fib? right below the .382 fib or .5 or .618?  Sure, why not.  Lets pick one.  And where is our target?  Presumably at the top of projected green wave v.  Well, this is dangerous.  I don’t believe many traders are successful picking a target and a stop loss and waiting for one or the other to get hit.  Most pick some action in the middle of a move and manage the trade once they’re in it.

The danger is in the subjectivity of Elliott trading.  From an Elliott standpoint, this trade setup is valid so long as green wave iv doesn’t overlap green wave ii.  That’s about a 370 pip risk for a potential 350 pip gain.  1:1 risk to reward isn’t bad if you think the preponderance of the evidence is in your favor.  But, that’s a lot of downside if we just initiate a trade at this level.  Just something to think about boys and girls.

As it turns out, this trade paid a few pips by going long at current levels.  But it didn’t reach the .86 target, I have trouble counting a fresh impulsive 5 wave push to where it did top out so judging by this elliott count, we should see fresh highs (eventually . . .But this is now over a month later and I’d rather get paid sooner than later).  Additionally, I think we look to be in short territory for a while.  This pair looks to be short until the fib retracement around .793.  Then we’ll have to look at price action and see what happens.

Here’s what I’m talking about:

So, from an elliott standpoint, we may still be in some sort of complicated wave 4 consolidation and this basic count is valid until we fall below wave ii, but who wants to wait a month to collect a few pips?

Here’s what I’m looking at on this pair:

And on a higher level:

To reiterate, we may be going higher, as that initial elliott count indicated, but you can make plenty of money by keeping things simple and managing your trade once you’re in it.  I don’t know if we’re going to test the downside targets that I just posted, and I don’t really care.  It’s important to be comfortable with your trade setup and pick low risk to reward setups.  How you do that is up to you.

Best of luck and happy trading,

Kosentrade

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