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Talking Points

-Bat Pattern offers a blueprint of the movements on the EURGBP

-Recent price pattern suggests an equal wave pattern

-Be patient for bullish trades in this 2 year pattern

The EUR/GBP cross rate for the past 1 to 2 months has remained relatively stable. Taking a closer look at the price pattern suggests there may be a fairly immediate move lower to retest support. If this happens, the test of support near .7860-.7870 is a zone where we can look for a more meaningful bullish reversal.

When analyzing the daily chart, the EUR/GBP appears to be carving out a two year bullish bat pattern that began July 2012. These patterns provide fairly tight reversal zones near the 88% retracement level of the preceding up move. That potential reversal zone in this case is near .7860-.7870.

Learn Forex: EURGBP Bullish Bat Pattern near .7860

(Created using FXCM’s Marketscope 2.0 charts)

Prices came to .7873 on July 23, 2014 after closely resembling the suggested retracement ratios of the pattern. The move on July 23 could have been enough to finalize the bullish bat pattern. However, since then, the pair has moved higher in an equal wave pattern which suggests there will likely be one more test of the .7873 low. This test, if it occurs, will allow us to position to the long side with a tight stop.

The equal wave pattern is one of my favorite patterns to follow. When one is discovered, it suggests prices are likely to retrace to the origination of the pattern. Since the recent price action is a bearish version of the equal wave pattern, then it suggests prices are likely to retrace to the origin at .7873. Therefore, patience is required before the bullish bat emerges from the cave.

Suggested Reading: How to Use Alternation Waves in a Forex Strategy (Part 1)

Suggested Reading: Timing Forex Reversals with Equal Waves

Learn Forex: EURGBP Bearish Equal Wave Pattern

We can confirm the equal wave pattern when yesterday the EUR/GBP reversed sharply at .8053. This is the point that would create a bearish equal wave pattern. That type of violent move at an equal wave point suggests the market is moving in harmony with the previous waves and a new low is likely on the horizon.

As a result, this two year bullish bat pattern is on pause until we get a retest in the .7860-.7870 zone. Look to place the risk on the trade below the July 2012 swing low near .7740.

There are a series of resistance levels in the way of the trade. The first target would be the September 2014 high near .8064. A big resistance level rests at .8150. Those price targets would offer an opportunity to scale out of a trade.

Implement conservative amounts of leverage so if the trade doesn’t work out, you would have lost only a small piece. Here is a guide on how to determine appropriate effective leverage.

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---Written by Jeremy Wagner, Head Trading Instructor, DailyFX EDU

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This article uses Fibonacci ratios to follow a pattern. To learn more about Fibonacci retracement ratios, register and take this free 20 minute on demand course. Register here.

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