Using several tools can help us gauge the market and also determine where it is likely to go.
The EUR/USD has been in an uptrend since May and has so far seen two corrections and two waves higher on the daily chart. From the trendline we can see the market just recently moved off the trendline level after testing it.
No analysis perfect, but it appears the trendline has held for now, and a further push higher is likely. But we can increase our odds of success – if we have decided that the pair is going higher (based on the trendline or other method) then we want a viable entry method and a realistic target.
Two sets of Fibonacci retracement levels have been drawn. The pink one is drawn based on the first wave higher which occurred in May. Fibonacci levels extend upwards, and it shows that after the market corrected and moved higher it came very close to the 261.8 level on the pink Fib ratio. This second wave of a trend is normally the most powerful because everyone can see a higher low is in place and prices are likely to rise. Therefore, that rallly was aggresive.
As of this moment we have pulled back from that aggressive rally high and corrected to our trendline. We expect another rally, but not as dramatic as the last one. This is where our next set of Fib ratios (in blue) comes in. This Fib ratio is locked on the recent high and recent low. Since we expect the uptrend to continue we are looking for a target to upside. A target would be just below the 161.8 blue Fib ratio or just under 1.3700. Since we don’t expect this rally to be as aggressive, we won’t use the 261.8 level, even though the last rally moved to that mark before correcting.
A couple things remain. We can enter now and use the 0.00 blue Fib line/trendline as our exit/stop, and then use the blue 161.8 Fib target (check marked on the chart).
Some traders may question whether we are indeed going to more higher off this level? They want more assurance. In this case, we can wait for a penetration of the high or get in slightly early by using an approximately 76% retracement level. If the price gets within 20% (we are just talking about the blue Fib area between 0% and 100%) of the recent high it is likely to move through the high when in a trend, so we can enter a bit early of the breakout point (the high) but still have confirmation that this market is moving higher. This method makes stop placement more tricky, as the reward has shrunk by entering later.
Of course, a breach of the trendline negates the trade, and then we begin to look for trades on the downside. As of now, the trend remains higher, appreciating the Euro.
Using multiple tools, and in slightly different ways than is typically taught can provide valuable insight and trading opportunities that may not have been seen otherwise.
Cory Mitchell, CMT
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