I was hoping to have a nice article explaining the difference between reversals and corrections posted here before I left on my mini-vacation to Dallas. Alas, fun came first but better late than never.

The idea of knowing how to measure a correction versus a reversal sounds easy in theory but without some understanding of the underlying trend of the time frame you are watching and without tool to measure this with it can be very difficult and thus has been relegated to trendlines (lagging) and guess-work (ineffective).

If you don't already know it, I use the Wave which is the 34EMA on the high, low, and close. I shared the plug in I use on MT4 to create this on your own charts, I call it "GRaB" which stands for "green red and blue".

So that brings me to yesterday's trade. I updated my Twitter yesterday which I believe is called "tweeting". My tweet was:

"Cable bouncing off 34EMA high (top line of Wave) for swing trade. Psych level support at 1.5000 - low was 1.4995."

I received a lot of emails which actually caught me by surprise since my swing trades are discussed with some regularity but then I thought, well why not share the process for this type of set up. I am going to share my MT4 chart set up here. I actually use the IBFX-MT4 version and I love the trading tools they make available for free on their site as opposed to having to search the MQL codebase.

The tools I use are the Daily Pivots, CPR, and the PRS. You can read about them at their site.

So here's a short of what I call the "quad view". Go ahead and click on the link to see the full size since it's larger than will fit here.

View image

These are all 240 minute charts since that was the time frame that I set the swing up on. I also have my GRaB plug in action on the lower left chart and the OsMA and CCI on the lower right chart.

The 240 time frame was perfect for the swing because the Wave clock angle was what I call "12 to 2" which means it was in an uptrending market cycle. In an uptrend it's my job to identify pullbacks that I could look to set up buys from in order to follow the trend...which is up. The entry may be contrarian because I am buying into short term weakness but it's a trend following trade. The only time I was buy the dips is in a uptrend. (Conversely, I look to sell the rips in an downtrend.)

This chart was the heart of the set up: A pullback to the support of the top line of my Wave. This is a conservative entry as compared to Fibonacci or other psychological levels that could have triggered a buy higher than this correction.

Another terrific cue was the candlestick pattern alert I got from the IBFX-CPR. Now, let me mention that candlesticks are rarely going to be the sole reason I enter a trade. I think they are excellent confirmation and most candlestick patterns are best used in a trending market.

The Bullish Engulfing pattern set up three candles back which (for me) is confirmation of my pullback that occurred six candles back. So the candlestick was simply a secondary (and nice!) confirmation.

Let's add some more depth here and remember these are all support and resistance tools. The Wave offered support, the Bullish Engulfing pattern is support and finally take a look at the next chart...

More support! This time with the daily pivot's S2 level which coincided with my Wave support. This is simple as good as uptrend corrections get.

See? Isn't forex fun? :)