Elliott Wave Analysis - Works Like Magic!

Welcome to the Magical World of Elliott Wave Analysis. On page 5 of this document, you will find the article you desired to read. If you like what you see there, you will probably wish to visit http://www.wavetimes.com/ That site contains a lot of interesting stuff that anyone who wishes to trade in the financial markets will find valuable. Enjoy!

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FOREIGN EXCHANGE NEWS, ANALYSIS AND EDUCATION FOR CURRENCY TRADERS

TRADER MAGAZINE

OPTIONS P r i m e r P s yc h o l o g y o f Quantum markets FOREX leverage Friend or foes ?

PPP return to

va luat i o n

O s c i l l ato r s a s Trend indicators

unconventional

monetary policies APRIL - MAY 2009

CONTENTs

FX

12 Unconventional Monetary Policies:

how policy makers are shaping the currency markets through confusing sometimes frantic decisions

09

Grammatical evolution:

38 05 Editor’s note

implementing a trading model through a promising evolutionary computing approach

MARKET WATCH 21 If...: when managers of traditional UK financial institutions MACROECONOMICS 06 Return to Valuation: how CPI- start looking at the FX market based Purchasing Parity Power can make it easy to derive longterm OPTIONS valuations in FX markets 25 FX Options Primer: using options as a safer means of hedging or speculating. Part 1. STRATEGY 18 Forex Leverage: Friend or Foe? The risks of using a high INTERVIEW degree of leverage on the Forex 38 Robert Marcellus FX Manager explains how he reached a +18,48% markets performance in 2008 30 Using Oscillators as trend following indicators: an example TRADING SYSTEMS of how the Stochastic can be 33 Building Robust FX Trading used to identify trends on various Systems, by identifying and exploiting a small edge, as many times as possible timeframes

Fundamentals of trading psychology: Part 1: getting prepared to cope with the laws of Quantum mechanics FOCUS 47 Bonds: why are bonds attracting retail and hign net-worth investors? TECHNICAL ANALYSIS 49 The Magic of Elliot Wave 23 Majors report 54 Technical Outlook INTERNATIONAL DATA 57 FX Spot Monitor 58 Central Bank Rates 59 Economica Data - FX Poll 60 Markets View 37 glossary FX TRADER MAGAZINE April-May 2009 03

FX CONTRIBUTORS Alessandro Balsotti, is head of FX trading in Abax Bank and covered the same role previously in Banca Caboto. For several years he has been the FX market-maker of Italian Lira, Greek Dracma and Czech Crown in JP Morgan. Ben Brown, has worked in the FX and Money Markets for 15 years with some major Interbank brokers and at one the UK’s largest independent Broker Dealers,. With a knowledge of the market from tier 1 to tier 3 Ben has a fundamental and somewhat lighter approach to the FX market. Grace Cheng is a seasoned forex trader, and founder and editor of www. DailyMarkets.com, a leading New Yorkbased financial blog. She is also author of “7 Winning Strategies For Trading Forex” (2007, Harriman House, UK), and the creator of the online PowerFX Course. Rodolfo Festa Bianchet is trainer and traders coach. He is CEO of Riflexo Ltd and founder of TrendRisk expert system. His analysis on Forex have been published on Down Jones Markets private network for over 10 years. He is regularly invited to run seminars on Trading Psycholoy at various financial and trading conferences. D. Roy Fraser, is the Managing Director of Incapital Europe Limited, the investment bank that runs a platform providing regulated financial intermediaries with investment-grade bonds, which can be further explored at incapital.com, internotes. com and structuredinvestments.com John Hydeskov, is senior FX strategist at Danske Bank FX research team. John joined Danske bank in 2007 and has worked with G10 FX strategies. He previously worked for Bank of England Exchange Rate team and Danis National Bank FX liquidity team. Steve Jarvis, from TraderMade International has over 20 years’ experience of providing technical analysis to FX professionals. Formerly Chief Technical Analyst at MCM Currencywatch and Informa Global Markets, Steve now heads the technical 04

FX TRADER MAGAZINE April-May 2009

analysis at InterpreTA, Tradermade’s newly launched technical analysis service. Ashif F. Jiwani, is Head of Derivatives Trading at Saxo Bank Capital Markets (Asia). He was previously global head of FX Options business at CIBC and has spent 8 years at Scotia Bank and CIBC trading currency derivatives in a market making capacity. JW Partners is an independent FX solution provider, based in Milan, with a strong FX specific know-how. JW supports institutional investors and HNWI in building quality FX multimanager portfolios, and FX underlying structures. Caspar Marney, started his trading career, as a spot currency trader and technical analyst with HSBC in London. He then moved to SBC Warburg (later UBS) as a proprietary trader and global head of technical analysis for FX and precious metals, where he became one of the bank’s most successful traders and a regular commentator on financial television. Maurizio Milano, began his career as forex dealer in 1995. He started the technical analysis department at Banca Sella Group. He teaches technical analysis at the University of Turin, Italy. His contributions can be found in the most renowned Italian financial newspapers and televisions: Borsa&Finanza, Il Sole24Ore, Il Corriere della Sera, Class-CNBC, RadioRai1. He is member of SIAT (the association of the Italian technical analysts) and IFTA (the International Federation of Technical Analysis). N.Ramakrishnan, better known as Ramki, is a professional banker and has been in the treasury business since 1984. He has been extensively quoted in Telerate and Reuters as well as finance journals and newspapers of repute. Ramki writes a web blog www.tradewithramki.com and has a website www.wavetimes.com Luca Taroni, is a quantitative trading system developer. Luca is head of Research & Development at Luxorlab.

Editor : Emmanuelle Girodet [email protected] Advertising manager: Monique Atlan [email protected] Webmaster: Hristo Katzarski [email protected] Graphic design: Preslav Dobrev Editorial support: Lorenzo Lorenzi Luca Di Bari

Trading carries a high level of risk, and may not be suitable for all investors. The objective of FX Trader Magazine is to give readers the tools, training and information which will help them be better prepared to trade on the foreign exchange. However, any analysis, news, research, strategy, or other information contained on this magazine is provided as general market information and does not constitute investment advice. FX Trader Magazine, will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.

Subscriptions: www.fxtradermagazine.com

TECHNICAL ANALYSIS FX

The Magic of Elliott Wave Analysis “Can anyone parlay a $10,000 capital into $1,000,000 in a year? In five years? If so, how do you do it and what are the risks involved?” – Robert Balan I have been practicing Elliott Wave Analysis for over 25 years, and have made some astounding calls that came true. But I cannot honestly say that I was able to turn a mere $10,000 into a million dollars. Yet, I can confidently say that there are very few technical approaches to dealing with the uncertainties of the market place as efficiently as does the Elliot Wave Principle. I am not going to give you the rules and guidelines governing the practice of Elliot Wave Theory. There are ample resources in the web that you can access at the click of your mouse. What I will do, instead, is to give you one example now, and show you how the magic of Elliot Wave Principle works in the Forex market. You see here two charts of Sterling Pound (GBP/ USD). The first is a monthly chart going back to the early 1980s. The second is a daily chart going to Oct 2007. The beauty of Wave Principle is that it works equally well in the monthly chart as it does in the 5-minute chart! Having said that, I must also add that you should not try to day-trade using the monthly chart! For example, the monthly chart suggests that our long-term target for the Pound is around 1.3300

(We have already reached 1.3498) but the daily chart points to a significant recovery, perhaps reaching as high at 1.6170 before down. Of course, there are several risk levels on the way, for example, it might run into considerable selling pressure near 1.4900. But let us first look at the monthly chart and see how the waves unfolded. Let us suppose that we are now in the early 1990s and have already seen the first big move from 1.0520 to 2.0045 (Point A). When the second attempt failed to sustain above that level, we should have anticipated a swift move down. Remember that the third step of any progression is always a powerful move. We could have easily calculated that a 61.8% retracement of the Wave “A” would lie at 1.4158. The move actually finished at 1.4063. Next consider the “c” wave that went from 1.7366 to 1.3677. Believe it or not, but that move was just 7 pips short of the 61.8% measure of the “a” wave. But the wonder doesn’t stop there. Wave “B” that went from 1.3677 to 2.1161 was only 2 pips short of 78.6% of wave “A”. The Elliot Wave Principle asks us to always be on the look out for Fibonacci relationships between alternating waves. FX TRADER MAGAZINE April-May 2009 49

FX TECHNICAL ANALYSIS Now let us turn to the daily chart. This is a lot more interesting. As you can see from the comments on the chart, one could have placed a low-risk “buy” trade near 1.7450 as it marked a 161.8% projection of the first wave down. One of the problems that many beginning-analysts face is how to pick a level and call it the end of a certain wave? For example, how did I label the 1.7450 level as a mini wave 3? With hind sight it all looks so good, but how on earth can one figure out that we will not break directly down? (See for example how the 261.8% level at 1.5628 did not hold). Welcome to the real world of Elliott Waves! The key to lasting success in the business of trading is to be honest to your paradigm. Follow your rules (whatever they may be) to the letter. The biggest sin that a trader can commit (second only to not having a stop loss) is to keep changing his rules. Take a look at the chart again. When you get a fast sell off, you should calculate various projections and keep them by your desk. I would have known that 1.7450 was a likely (but not certain) support. I would not buy there the first time. Typically in a fast moving market, we will always get a retest of the lows. If the market stabilized near a Fibonacci projection at the first try, I would place a small ‘buy’ order near the prior low with a stop just a few pips below that low. As you can see, we got a second test of 1.7450 two or three days after the first try. Since the buying interest was strong at that level, the trade paid off handsomely. (Another tip: Depend on daily charts more than hourly charts to figure out supports and resistances). Let us look to the future now. Why do I think we could go higher to around 1.6170? First of all you should understand that in order to make money, it is not so important to know the medium term targets as it is to know the general 50 FX TRADER MAGAZINE April-May 2009

direction! So what if we don’t get as far as 1.6170. Most traders would be just as happy to catch a move to 1.4900.! Anyway, back to the question. We saw that Wave (2) at 2.097 was a ‘simple’ correction. This means there is a high probability for wave (4) to be a complex one. We have already seen that the “B” wave (as labeled by me) is an irregular one, with the low coming well below the end of the Wave (3). If you accept this count as valid (and remain truthful to that count until proved wrong) then you should look for the Wave “C” within the Wave (4) to go well above the top of the wave “A.” Besides, the second test of the low seen AFTER posting the “B” wave bottom was unable to break the prior low. And finally, we not only saw a strong move higher, but it has managed to break above a declining (green colored) downtrend line. These are just some of the reasons why I am looking for Sterling to continue moving higher. It is vitally important to have an open mind about these things. Consider this. I have a market reputation and will look silly if the Pound stops climbing and goes down directly. Should I allow that to bother me? If one only worries about being ‘correct’ in making market calls, one will never be a good trader. A trader has to study his charts and make the most educated prediction about what will happen next. He should then execute his plan of action without wavering one bit. This includes having an affordable stop-loss, as well as plans to take profits along the way. There is no other way to riches.

Ramki (N.Ramakrishnan)