A real-life example of how Tramline Trading Forex works in a real time example trade in AUD/JPY. Guest post by John Burford, author of "Tramline Trading, A practical guide to swing trading with tramlines, Elliott Waves and Fibonacci levels".
Tramline Trading Forex
I wrote my new book for those traders who wish to learn and follow my simple but highly effective methods which incorporate strict, but equally simple, money management rules. It is a visual chart-reading method where time-honoured chart patterns are sought.
Once a certain pattern is identified, high-probability trades can be entered at low risk (close stops) and price targets can be established.
Using a combination of tramlines (a method using trendlines that I developed), Fibonacci levels and basic Elliott Wave ideas, my method is ideal for traders that have a life outside of trading, because most orders can be planned in advance and resting stop or limit orders placed when convenient.
Here is a real-life example of how my Tramline Trading system works in real time in AUD/JPY.
This is a very popular cross to trade, because it follows the commodity cycle: the AUD is a commodity-producing currency, while the JPY is a commodity-importing currency. Their interests are very much opposed, which results in very large waves ? ideal for swing trading!
This is the daily AUDJPY chart going back over a year:
Tramline Trading System in AUDJPY forex chart
[Tramline Trading Forex: Fig 1 - Tramlines Drawn on the AUDJPY Chart - see chart at http://www.tradersdaytrading.com/tramline-trading-forex.html ]
Last year, the steep decline off the 105 high occurred in five clear impulsive Elliott Waves, with the third wave long and strong, which is a typical requirement for an impulsive pattern.
At the fifth wave low, there was also a large positive momentum divergence between the simple momentum reading at wave 5 and that at wave 3 (red bar). This is a huge warning to expect the decline to end soon and to expect a relief rally. That is a signal to take short trades off the table and bank your profits.
The rally off that low has a clear three-wave A-B-C structure, which is counter-trend. When the C wave ends, that means the relief rally is over and the main downtrend can resume. That is the ideal place to enter short positions.
Why Draw Tramlines?
I have drawn in my tramline pair where the tramlines enclose all the trading since the low. The upper line is a line of resistance, while the lower line is a line of support. This is a key concept in my method. It means that if the market can break out of this channel, the move is likely to be a strong one.
The market is currently testing the upper tramline, and there is a small negative momentum divergence at the most recent high. This is a clue that the rally is likely over.
The other clue is that the C wave has reached the Fibonacci 62% retrace level, which is the most common level for a turn to occur. I always look for signs of a turn when the market has reached this level.
My Conclusion - the rally is over
The bottom line from the daily chart: It appears the relief rally is about over and the main down trend is about to resume with a price target on my lower tramline in the 90 region. Lower targets beckon.
But I trade off the hourly chart - the daily isn?t fine enough to pinpoint accurate entries.
Elliott wave analysis shows a clear 5 waves in the AUDJPY chart
[Tramline Trading Forex: Fig 2 - 5 Complete Elliott Waves in AUDJPY - see chart at http://www.tradersdaytrading.com/tramline-trading-forex.html]
This is the hourly chart showing the rally off the 21 May low. The Elliott Wave count is clear ? there is a textbook five waves up. The third wave also sports its own five sub-wave pattern.
With the fifth wave making a new high in the 96.50 area (and with the negative momentum divergence on the daily), the scene was set for a reversal. In Elliott Wave theory, fifth waves are always ending waves.
Tramline Trading System
My trade entry
A short trade entry was in the 96 area with protective stop above the wave 5 high.
The market has recently retreated in two clear waves so far and as I write, my wave 1 low has been broken and that is a clue we are likely in a third wave down.
According the Elliott Wave theory, third waves are usually long and strong and my immediate target is the 21 May low in the 93 region.
How will I handle the trade?
In terms of trade management, I am short from 96 and because the market has moved in my favour by a distance greater than my original risk, I can employ my Break-Even Rule. That means I can move my protective stop to my entry point.
The result: the worst case scenario is a wash trade where I will suffer no loss if the market moves back up through my stop. This is a great money management method to use of you want peace of mind while trading.
If there is one thing that can improve your performance it is this: get yourself into a state of mind where you are not anxious what the market does after your entry. You will not lose money if you can use the Break-Even Rule.
And the best case scenario? A move down to the 2008 low at 55 for a stonking profit of over 4,000 points, or $40,000 for a simple spread bet.
This is the method I use to analyse markets and it can be used in virtually any market that has large participation, such as forex and stock indexes.
Tramline Trading by John Burford
Guest post by John Burford, author of Tramline Trading, A practical guide to swing trading with tramlines, Elliott Waves and Fibonacci levels.
Publisher: Harriman House
Published: 14 July 2014
Pages: 200 - See more at: http://www.tradersdaytrading.com/tramline-trading-forex.html#sthash.odj1ExaT.dpuf