AUDUSD is one of the most favorite currency pairs for trend lovers. The pairs stay trending most of the time. Trending pairs trading with “a b c correction” is one kind of continuation trend trading technique. This trading strategy is the result of the extreme back testing and analytical approach by professional trend traders. Trading with corrective waves requires extensive knowledge about Elliot wave theory. Some professional traders use moving average in order to simplify the method of understanding the wave theory with greater precision.
In the above figure, 100 days moving average and 200-day moving average is used for the identification of the trend. The 100-day moving average is below the 200 days moving average which indicates that the prevailing trend is a down trend. After a long move in the south, the pair fails to create a new lower low which indicates that a possible correction is coming. Here the moving average helps to identify the corrective wave of the Elliot wave theory. a ,b and c are the corrective Elliot wave and the green line capped the correction of the pair.
Trading condition and entry setup
1. This trading strategy works well only with the AUDUSD pair. Many pairs have been back tested but the best winning ratio comes from trading the AUDUSD pair. It’s imperative that traders should practice this strategy with a demo account in order to fully understand its features.
2. A trader should expect the correction to be formed only when the market fails to create a new lower low in case of an uptrend and new higher high for down trend.
3. The two moving average should diverge from one another while the correction is in place. The b wave of the correction must be above the 100 days moving average for a downtrend and below for bearish trend.
4. The corrective wave should hit the 200-day moving average and it completes its correction for a bearish or bullish candlestick pattern depending on the prevailing trend.
5. Once the price action confirmation pattern is printed on the chart near the 200-day ma trader should look for an overbought condition in CCI for the bearish continuation and oversold condition for bullish continuation.
6. Stop loss should be placed just below the 200 days moving average for an uptrend continuation pattern and for downtrend it should place above the 200 days MA. Many professional trader put their stop loss more than 30 pips away from heir desired level in order to overcome the false spike of the currency pair.
7. Last but not the least proper money management method should be used while trading the pair with this type of trading strategy. No matter what, it’s very likely that traders will have series of losing trades once in a while. All the professional traders keeps that knowledge in mind and take risk according to their tolerance level.