Uncertainty and Trading, Part 3

I thought I’d round off the week with this idea.

On Wednesday, I took time off from my schedule just to gather my thoughts. I had been feeling uneasy about the EURUSD trade and not because I had been trading a larger than normal size. My gut was feeling the way it feels when I am missing something important. I have found that the best way to deal with the situation is to go away to a quiet corner and start from my basics.

In this case, it meant labeling the impulse and corrective waves in the current structure (see Fig 1). Once I did that, I realized what the feeling was about. It was telling me I had formed myopia about what was happening. I had started with the idea that the structure was either a ‘6-wave Running Correction’ or ‘3 Drives to a Low’. Even the subsequent labeling of the sideways (a) to (e) in Fig 1 was predicated on the initial scenario.

Once I stood back, what jumped out was this question: was the market reacting to zones of the corrective structure waves  1 to (a) or waves 3 to (a)? Once I identified that, [waves 3 to (a)], everything else fell into place.

1. The correct placement  of the stop was above the Waves 3 to (a)’s Maximum Extension, 1.3857
2. If this idea was correct, the market ought not accept above 1.3747 (the ME of the small Sideways Pattern (a) to (e).
3. A penetration of the reaction high at 1.3691 ought to result in a move down that should at least lead to a test of the low at (e).

These were my journal thoughts prior to trading yesterday.  Adding to that, after last night, a rally now above 1.3735 would mean a rally originating from the Death Zone. This would lead me to exit my shorts before my stop is hit because:

1. Death Zone rallies usually result inthe start of a new impulse move and
2. The penetration of 1.3691 and re-acceptance below the Primary Sell Zone of the ‘3 to (a)’ structure ought to have resulted in a move to at least 1.3444 before the market re-penetrated 1.3735. In such a situation, I had a Negative Development Buy Signal.

Interestingly (and I guess to be expected): once I saw that waves 3 to (a) were the boundaries of the active range, my discomfort went away.

FIGURE 1