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Page: Understanding Retracement Levels in Flats - Price and Time Trading

Price and Time Trading - Retracement Levels in Flats

Differences between fake and real wave moves

Trading without taking into account the time element is like missing the other half of the picture. Whenever both price and time are considered any trading analysis is supposed to be completed.

The recent price action in the GBP/USD pair offered us such a situation when time could be incorporated in the trading analysis and we are talking about the move down from the end of a possible impulsive move of a lower degree.

Three waves move

The move there that you can see on the chart below is a three waves move to the downside and whenever you are looking at a correction to start then you should interpret the structure for the first move. In this case this is a three waves move and the logical thing to look for next is a flat, as flats are moving with three-three-five structure. In a flat the key stays with the b wave and it is mandatory for the b wave to have still a corrective structure, coming in the form of another three waves of a lower degree and to retrace 61.8% of the previous wave a. The 61.8% retracement level is mandatory and should be targeted. However, the first time market reached that level was not the real end of the b wave, but it was a fake move. The reason for that? The time element.

../images/Forex-wave-chart.jpg

This chart shows a three waves move, to help you understand the difference between fake and real wave move.

The b wave in a flat should be the most complex structure and should take the most time when compared with the other waves of the flat. That should be incorporated in the analysis by measuring the time taken for the first move to the downside and projecting it on the right side.

Time can be measured by taking two vertical lines from the beginning of the move to the downside until the end of it and then with a short horizontal line measuring the distance between them. This is time. Projecting it on the right side and you have the minimum time taken for the b wave.

Look for retracement level

Therefore, the first break of the 61.8% retracement level should not be considered the end of the b wave as the time is too short when compared with the first move. Remember? Wave b should be the most time consuming. As a consequence, the trader should wait for the time to expire and then look for the 61.8% retracement level to be touched as that is the real end of the b wave.

In our case here there is no big difference in price between the two situations but there are cases in which simply by taking into consideration the time a wave should take to form/complete, will keep you on the right side of the market.

This article was written by Nick from Forex Bonus Lab. If you are ready for trading, you can pick one of the best ECN forex brokers at their website.

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