Trading the Forex Wave

In this months issue of Stocks & Commodities magazine, Raghee Horner writes an article called, "Trading the Forex Wave" which is very similar to her webinars and books.  I did learn some things from the article though which is why I'm mentioning it.  For one thing, I have to commend her for her consistency.  Never has she swayed from her method of trading.  In addition, she keeps everything pretty simple with a touch of technical analysis and discretion.

If you have not read anything from Raghee, I'll explain her main analysis tool which is "The Wave." The wave consists of three lines, the 34 EMA of the high price, the 34 EMA of the low price, and the 34 EMA of the close price.  "The Wave" in the following picture are the 3 pinkish colored lines:

This Wave is used primarily as a tool to see if the market is trending or heading sideways.   This article talk mostly about momentum so therefore, what we look for in the Wave are 3 lines that are pointing towards 3 o'clock if the chart was a clock.  In the above example, before the price breaks up at the end of the chart, the Wave shows that the market is sideways.  Raghee trades this in the following way.  

1. She draws all of her trend lines first before trying to identify any chart pattern such as triangles, pennants, rectangles, wedges, flags, head & shoulders, or rounded tops/bottoms.  She states that drawing first will prevent you from forming a pattern that may be in your mind.  "Look hard enough at the clouds and you'll see a bunny; look hard enough at the charts with a specific pattern in mind and the pattern will appear."
2. She will then wait for the price to break the upper wave line.  She may go long once the price breaks above this upper wave line but in the above example, there is a trend line that cuts down through the wave.  Therefore, she would wait until the price breaks this trendline.
3. Once the price breaks the trendline or the upper wave line if no trend line exists, she will then reference the MACD histogram.  She uses this as her confirmation tool.  If the histogram is above 0, she will take the long trade.  If it is below 0, she would not.  She would not wait for the candle to close since she uses the MACD histogram to confirm that the pattern has been pierced.

Here are a couple of other points she makes.

There are 4 market cycles at any given time: 

1. Accumulation (consolidation)
2. Distribution (congestion)
3. Mark up (uptrend)
4. Mark down (downtrend) 

• Congestion and consolidation patterns should only be used in sideways markets
• Exit positions based on significant support or resistance levels

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