Sentiment in the Forex Market: Indicators and Strategies to Profit from Crowd Behavior and Market Extremes

P1: PIC/b P2: c/d QC: e/f T1: g

c07 JWBK195-Saettele June 5, 2008 19:52 Printer: Yet to come

174 SENTIMENT IN THE FOREX MARKET

FIGURE 7.24 Ending Diagonal Trade Setup

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the correction that has unfolded is not a simple flat or zigzag, but rather

a complex correction that is composed of a string of simple correc-

tions. Trading wave C of a zigzag is explained earlier in the 1–2 Base

section.

After a five wave impulse, always expect a correction. If, after the three

wave correction, price has failed to retrace even 38.2 percent of the previ-

ous five wave impulse, then probability is high that a larger flat correction

is unfolding and that the initial three wave correction was just wave A of

the larger A–B–C correction. Remember, in a flat, the wave B retracement

is usually deep. In an expanded flat, wave B actually exceeds the origin of

wave A. Expanded flats are common in FX, perhaps because the high de-

gree of leverage leads to extreme price spikes that temporarily exceed the

origin of wave A. This tendency makes trading wave C of a flat frustrating

sometimes. Still, the reward-to-risk ratio in such instances warrants taking

action. As mentioned, flats tend to occur as fourth waves. However, trian-

gles also occur as fourth waves. When attempting to trade the end of the