EURUSD: Thought ProcessThis is an update on the previous post I shared on EUR/USD, with a detailed explanation of the thought process.
In this chart we have a bearish trending market as the root cause of a 3.6% decline in prices. A bearish trending market is defined by lower lows and lower highs.
A red sloping diagonal line highlights the bearish trending market by connecting the lower highs, which gives visualisation of a descending angle, confirming the downtrend.
When looking for a trading opportunity, we want to trade in the direction of the trend. More often then not, prices will continue to trade in the direction of the trend rather then reverse, with the exception of when a major demand level is present.
Traders who have missed an initial swing low in a downtrend, is provided with an opportunity to ride the trend on a pullback. In such cases traders look to enter between a 38.2-61.8% fibonacci retracements.
38.2%, 50% & 61.8% is the fibonacci retracement levels that are most often used and these are the levels that most often hold.
These levels are also plotted on the chart, using the fibonacci retracement tool as black horizontal lines.
Simple does it, but is this enough to provide a clear trading opportunity?
In order for us to increase probability of success while mitigating the potential risk, we have added a twist to our trend trading philosophy with advanced pattern formations.
The highlighted pattern shows a bearish bat pattern. Advanced pattern formations can be a very reliable signal, because of the quantified measurements. Every pattern consists of a potential reversal zone or PRZ. The PRZ for this bat pattern consists of the obligatory 88.6% (XA) retracement, a 161.8% (AB) extension and a symmetric 100% (abc) projection. These are highlighted as blue lines. Usually we want to look for an alternate ab=cd pattern within bat patterns, but its still a valid set-up with resistance at ab=cd, some would call this a Gartley.
We can see that the PRZ has a lot of confluence. Not only is the PRZ on its own a cluster of fibonacci levels, indicating a major resistance level, the sloping diagonal line confirms the pattern with 50% retracement of a previous swing within the trend which shows more confluence within the PRZ. This is a strong signal. I am expecting the downtrend to continue, down to atleast 161.8% of the bat pattern at 1.054 or a 160 pip decline from current prices.
Waiting for the trade to play out. I am risk free after having booked partial profits once price hit the previous traded lows at 1.065.
If you find this post helpful, make sure you hit the like button and comment your thoughts below.
Thank you for reading
May God bless
