Price and Time Trading - Retracement
Levels in Flats
Differences between fake and real wave
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.
|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.
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