“Everyone has the power to follow the stock market. If you made it through fifth grade math, you can do it.” – Peter Lynch
Last week we took a look at a the euro’s 135-ish pip range and said we are in a bull move, we shouldn’t fight the move and we may experience a deeper pullback, but so long as the trendline we illustrated held, we should look to buy.
All that took place about 200 pips lower. More specifically, I recommended buying Fibonacci retracements of the prior swing move higher, and suggested that if we made it down to the .5 or .618 retracement of the move from about 1.300 to 1.340 that would be a good place to buy and re target the highs and maybe an extension / additional resistance around 1.35.
Well, you can’t get everything right, but see Figure 1 below. Look at how well our support and resistance lines have worked. Really, the only thing I missed was the deeper pullback. In just the most recent consolidation, the top and bottom lines we drew last Monday held the range (until they broke) and then things went long to our next resistance line farther up.
THREE CHOICES FOR A RANGE
When in a range a trader can really do one of three things. You can buy the lower support in expectation of a move back to the high. You can sell the tops in expectation of moves back down to prior support or you can sit there and wait for a directional move. I’ve watched this stuff for years, and as long as you manage your risk, I don’t think there is any more risk associated with buying the bottom of a consolidation and targeting the top, or a continued move higher, than there is in waiting for a breakout.
After all, if you’re buying the lower end of a consolidation pattern, you’re really just buying a pullback in a prior breakout move. For some reason, a lot of people don’t like trading this way. They like waiting for a breakout, then jumping in once the move is almost over. That never made a lot of sense to me. Personally, I’d much rather follow the trend, buy in a consolidation and target a move higher. You can define your risk, anticipate an exit point, and manage the play.
JUST CATCH ENOUGH
Remember one of my other golden rules for trading: You don’t have to catch the whole move. You only have to catch enough of if to make you money.
Too often I hear new traders saying “I’m not getting out, price hasn’t hit my target.” Well, price doesn’t have a great deal of respect for your target. Watch what it’s doing, and if it says your target is unrealistic, you should probably go with price in deference to your opinion.
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