How to Set Targets for Subwaves in Forex Markets
A brief lesson from Jim Martens
By Jill Noble
Fri, 29 Jun 2012 13:30:00 ET
 Get investable insights sent to your inbox at least once a week â€“ for free. Challenge the way you think about investing with The EWI Independent. Privacy

If you use technical analysis to trade currencies, you know what a challenge it can be to set trade targets.

Yet, according to EWI's Senior Currency Analyst Jim Martens, trading forex with the Elliott Wave Principle doesn't have to be complicated. To celebrate the release of his new DVD, How to Trade Forex with the Elliott Wave Model: Lessons in Real-Time Trading, Martens shares the following lesson for forex traders:

Within an impulsive movement, how do we derive targets for each subwave within the sequence?

Figure 1

Since wave 2 serves to correct wave 1, we need to have a useful retracement measurement. The standard Fibonacci retracement measurements for wave 2 are .382 and .618.

In this case, you can see that wave 2 exceeded the upper retracement level (0.618). That’s fine. Wave 2 can retrace up to, but no more than, 100 percent of wave 1. Still, an extraordinarily deep wave 2 sends a message. It tells us that this is probably the entire correction.

Once the market starts lower, it will continue lower in the third wave. If wave 2 had ended closer to the 38.2 percent retracement, it's possibe that the market could come down to retest the wave 1 low, and then rally again to complete a larger correction (such as a flat). That said, once you do see a retracement this deep, it makes a larger correction unlikely.

Figure 2

Wave 3 is a continuation of wave 1, in a sense. A common Elliott wave guideline is that wave 3 is often the longest movement of the three impulsive waves (waves 1, 3, and 5).

To identify a target, calculate where wave 3 will reach 1.618 of the distance traveled in wave 1.

In this case, you can see that the market came right down to this level (the lowest blue horizontal line), exceeded it slightly but bounced back in the same session.

Remember that these measurements are objectives only. They give us only an idea of where the market might turn — not an absolute certainty.

Figure 3

Like wave 2, wave 4 is a correction, but it corrects wave 3. So let's look again at Fibonacci retracement levels — the 38.2 percent and 61.8 percent retracements.

Wave 2 was extraordinarily deep, so it comes as no surprise that wave 4 was not so deep. It pushed up into the lower end of the Fibonacci area (the 0.382 level) twice before falling. The alternation between waves 2 and 4 (one being a deep retracement and the other one shallow) is so common that it is a guideline we use in wave analysis.

Figure 4

Wave 5 is once again a continuation of the previous impulsive waves. The first target level to look at is where wave 5 equals wave 1. In this case that is right about 157.00, and we can see that the market has already reached that level in what looks like a five-wave move. We definitely should be on the lookout for a bottom.

Since there are five waves down in the fifth, the entire movement from October could be complete. Wave 5 can exceed the measured objective, but the wave structure alone suggests that a low is at hand, and the fact that we’re very close to the measured objective only strengthens that message.

Be sure to follow the guidelines of the Wave Principle to help determine targets for the subwaves within an impulsive structure. However, it’s best to always look at wave structure first and measured targets second.

If you are ready to learn specific techniques that will help you increase confidence in your forex market forecasts, we have great news: Now through July 13, you can get Jim's new DVD for only \$79! (You save \$20.)

Rating: - based on [33 rating(s)]
Rate this content:

 Aug. 11-14 4-Day Market Mentor Trading Course - Orlando, FL - Save \$600 Now
 Aug. 15-17 San Francisco Money Show
 Nov. 10-13 New Orleans Investment Conference

EWI's Currency Specialty Service delivers 24-hour-a-day coverage of the world's most traded currency pairs so you'll know every Elliott wave implication of every market move. Subscribe now and get instant access to actionable forecasts for:

Discover what a team of Elliott wave experts can do for your forex trading>>

Free 14-page eBook

EWI's Senior Currency Strategist Jim Martens pulls from 25+ years of experience using Elliott wave analysis to show how you can put the power of the Wave Principle to work in your forex trading.