Forex Strategies for the Advance Phase 04/23/09

In the last post I used British pound as an example to discuss the forex strategies for base building phase. On April, 23, pound made another textbook example for the second phase in a full price cycle - the advance.

In the advance phase, the market is in an uptrend, usually a buying day in The Taylor Trading Technique, in which the price action tends to make higher lows and higher highs. The five waves (wave 1 ~ 5) of elliott wave theory give a good description for an uptrend. Wave 1, 3, and 5 are impulsive waves, which is the main trend, while wave 2, and 4 are corrective waves, which is against the trend.

The 5-wave structure is labeled on hourly chart. The most tricky part is to identify wave 2 and 4, since both waves formed a downward channel. A normal trading strategy for the advance phase is to long dip bottom. If a long entry was made at the first dip bottom, it will be challenged during the formation of wave 2 and 4. If the stop is tight, long positions can be easily stopped out.

Best entry to follow the up momentum is to long at the breakout of the top of channel or add position at breakout of the horizontal resistance level. After the breakout, wave 5 surpassed former swing high and reached 50% Fibonacci retracement.

To summarize the forex strategies for the advance phase,

1. only long position is considered during the advance phase

2. entry A: long at end of wave 2

3. entry B: long at end of wave 4

Forex Strategies for Base Building Phase 04/22/09

There are four phases in a full price cycle: base building, the advance, top building, and the decline. Different phases in a forex cycle require different forex strategies. Recent price action of British pound is a textbook example for trading during base building phase.

Monday (4/20/09) was the third down day for British pound, also a WS7 (wide spread 7) day. For swing traders, it's the time to collect their pips. For day traders, it would be unwise to chase any breakdown signal to naively believe they are following the trend. It's equally unwise to fade the trend too soon.

On Tuesday (4/21/09), there are two big bearish candles(see hourly candlestick chart) which took Monday's low. Impatient bulls were threaten to close their long positions, either by stop hitting or out of scare the trend will continue. To add salt to the wound, both breakdowns were fake. In that case, reckless bears got burned too. It is proved that chasing a breakdown after the third down day (WS7) is not a rewarding strategy.

After the second fake breakdown, pound made a rally, the dip from the rally made a higher low, which offered a nice spot for long entry.

On Wednesday (4/22/09), in light of Annual Budget Release, pound was hammered down 262 pips in two hours, and took Tuesday's low. The same scenario happened again - bold bears and bulls got burned dearly.

To summarize the forex strategies for base building phase,

1. chasing a sudden breakdown signal is not a high probability strategy

2. bottom guessing usually got burned during base building

3. Better wait for market out of base to make any commitment