You may have seen a TV ad where "traders" describe their strategies, and one says, "I trade on fundamentals." Let's see how this approach may work in real life -- in forex.
On October 4, the EUR/USD fell to $1.3152 -- the low not seen since January 2011.
When your market erases almost all of the year's gains, the chorus of pundits always gets louder. As the EUR/USD was dropping, mainstream forex observers were almost unanimously blaming the European debt crisis.
But after hitting that October 4 low, the EUR/USD reversed and shot up in a big, bold 500+ pip rally. Would "the fundamentals" have helped you catch it?
In retrospect, some forex traders would say yes. Although things did look bad for the euro on October 4, the European Central Bank was meeting on October 6, and hopes were high that "something would be done" to stop the European debt crisis.
Looking back, that sounds reassuring -- after all, the EUR/USD did bottom two days before the ECB meeting. But if you think about it, all that "fundamentals" gave you at the time was hope. Hope that whatever the ECB decided, forex traders would see as bullish for the euro.
If you want something more solid than hope to base your forex trading on, consider Elliott wave analysis.
As the euro was nearing its October 4th low, if you knew Elliott you could see a declining 5-wave Elliott wave pattern coming to an end in the EUR/USD charts. Any time you see a finished 5-wave move, you can expect a trend reversal, however temporary. That's why on October 5, our forex-focused Currency Specialty Service reiterated this euro-bullish EUR/USD forecast from a day before:
Update For: Thursday
Posted On: Wed, 05 Oct 2011 21:22:22 GMT
EURUSD Last Price: 1.3348
[Bottoming?] Tuesday we wrote that the possible five-wave decline from 1.3691 warned that at least a temporary low may lie near. The euro did recover. The initial rally from 1.3146 unfolded in five waves, suggesting a larger recovery is in store.
This forecast was made before the ECB meeting on October 6 -- and, in fact, had nothing to do with the ECB; only with the Elliott wave pattern.
Wave analysis is not perfect. But it gives you one strong advantage: While other forex traders are guessing about "fundamental" what-ifs, you have an objective, defined metric for making a confident forecast.
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