https://doi.org/10.37955/cs.v6i1.241

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eISSN: 2600-5743

Forecasting the future trend of the

EUR/USD exchange rate, using

advanced technical analysis tools

Previsión de la tendencia futura del tipo de cambio

EUR/USD, mediante herramientas avanzadas de análisis

técnico

Reinaldo Molina Fernández

Licenciado, Departamento de finanzas, Universidad de La Habana, Cuba

reinaldo.molina@fcf.uh.cu

https://orcid.org/0000-0003-1042-5654

Daer Manuel Peña Crespo

Estudiante de la Facultad de Contabilidad y Finanzas, Universidad de la Habana, Cuba

daermpenacrespo@gmail.com https://orcid.org/0000-0003-3201-889X

ABSTRACT

Exchange rate forecasting is a major aspect of exchange rate risk

hedging. The objective of this research is to propose a procedure to

improve the forecasting of the future trend of the exchange rate. In

order to achieve the required results, the use of a set of technical

analysis tools is proposed, namely: Elliot waves, harmonic patterns

and chartist analysis. The main result obtained in this research is that,

by means of the proposed tools and the fractality principle, it is

possible to forecast the exchange rate regardless of the time horizon to

be analyzed.

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RESUMEN

La predicción del tipo de cambio es un aspecto principal dentro de la

cobertura del riesgo de tipo de cambio. El objetivo de esta

investigación es proponer un procedimiento para mejorar la previsión

de la tendencia futura del tipo de cambio. Para lograr los resultados

requeridos, se propone la utilización de un conjunto de herramientas

del análisis técnico, a saber: las ondas de Elliot, los patrones armónicos

y el análisis chartista. El principal resultado obtenido en esta

investigación, es que, mediante las herramientas propuestas y el

principio de fractalidad, se puede pronosticar el tipo de cambio

independientemente del horizonte temporal que se analice.

Keywords/ Palabras clave

Waves, fractality, change

Ondas, fractalidad, cambio

Introduction

The financial market with the highest volume of daily transactions is

the international currency market, known by its acronym in English as

Forex. It is increasingly influenced by the political and social context

facing nations, which leads to a direct correlation in the level of

volatility that many currency pairs have presented over the years.

The current context has been dominated in recent times by the scourge

of the pandemic caused by the coronavirus, which has had a direct

impact on the economy of all countries in the world and, therefore, on

the financial markets. Specifically, the damage caused by this virus in

the European and US economies had a direct impact on the

fluctuations of the EUR/USD pair over the last two years, resulting in

increased risk for companies using these currencies.

In addition, the interference of the United States in the Cuban

economy limits the possibilities of its development. This is achieved

through restrictions such as those applied by former U.S. President

Donald Trump, or the blockade unjustly imposed for decades that

limits the participation of our country in the financial markets.

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This situation obliges Cuba to optimize its risk hedging mechanisms in

order to avoid substantial losses in market operations and to continue

the sustainable growth process it has been working on despite the

obstacles.

An important phase of the procedure for hedging foreign exchange risk

is the forecast of the future behavior of the exchange rate trend.

Through this, future trend expectations are identified, with the

objective of applying hedging instruments to help mitigate losses

associated with exchange rate fluctuations.

In Cuba, some organizations have approved exchange risk hedging

policies, but they are not satisfactorily complied with, partly due to a

lack of knowledge of the tools necessary to effectively forecast the

behavior of the exchange rate.

This publication stands out as a research result of the National Finance

Project of the Faculty of Accounting and Finance of the University of

Havana. In response to the demands of the organizations that present

this type of risk in the country, the scientific group led by Professor

Dr.C. Fidel de la Oliva de Con, at the Faculty of Accounting and

Finance of the University of Havana, has worked for almost a decade

to achieve satisfactory results through research carried out on

exchange rate risk prediction and hedging procedures.

It can be stated that the central purpose of any market analyst is to

know the situation in which the financial markets are, and this can be

achieved through the study of price action, patterns and their

structure. (Hernandez, 2020).

Technical analysis, according to Murphy (2000a), "is the study of

market movements, primarily through the use of charts, for the

purpose of forecasting future price trends." (p.27)

This type of analysis presents three fundamental pillars documented

in Dow's theory. These fundamentals provide a great starting point for

an in-depth understanding of technical analysis (Murphy, 2000b):

• The price movement is expressed through trends: technical

analysis is based on the identification of the trends that are

forming in order to trade profitably with them, and also to try to

predict their change.

• Prices are the essence of technical analysis, everything else will be

discounted: the central axis of Dow's theory is that only the

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information provided by the price is sufficient to determine the

future path of the price action, which is why the study of price

charts is used to carry out this analysis.

• History repeats itself: the fluctuations reflect the bullish and

bearish psychology that the market possesses, as these patterns

have worked in the past, and can be assumed to be useful in the

future.

Charts are divided into three main types: line, bar and candlestick. The

most important and useful type of chart is the candlestick chart, since

it includes four different types of quotes: the opening, closing, highest

and lowest of the session, where the rise or fall of prices will make the

candle assume a green, blue or white color, in the case of a rise, and in

the case of falls it is usually red or black. (Molina Fernández, 2018a).

Charts comply with a property that is fundamental in financial

markets: the principle of fractality. The term fractal, according to the

Real Academia Española (2019), refers to an "iterative structure that

has the property that its appearance and statistical distribution do not

change whatever the scale with which it is observed" (p.4266). Applied

to technical analysis it implies that any type of pattern that is studied

can be appreciated, with the same structure, in any temporality.

(Valdecantos, 2016).

Candlestick interpretation: Candlesticks can be of different sizes and

shapes depending on the market context. The combination of different

types can give signals to the trader of the direction that the price action

will take in the short term. For this reason, patterns are studied as:

(Candlestick Interpretation Manual, 2009).

• Engulfing candlestick: Enveloping candles usually appear after the

end of a trend to start a new one. They can be of two types: bullish

and bearish, and are characterized by their large size, which is

likely to indicate the beginning of a new trend.

• Doji: The doji candlestick emerges in times of market uncertainty.

Its effectiveness increases as more candles of this type appear, and

represents a period of temporary pause in the main trend and the

beginning of a sideways movement. It is characterized by having

the opening and closing price equal, resulting in a cross-shaped

candlestick.

• Hammer: The hammer candlestick may appear at the moment

when a downtrend is preparing to turn bullish. It is characterized

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by having no upper wick, and the lower wick must be long. Its

effectiveness increases when it is preceded by a bullish engulfing

candlestick that confirms the market's buying psychology.

• Hanging Man: The Hanging Man is the opposite version of the

hammer. This pattern arises at the moment when an uptrend is

preparing to turn bearish. Its confirmation occurs after the

formation of a bearish engulfing candlestick.

• The sunrise and sunset stars: Both patterns are composed of three

candlesticks. The dawn star is formed by a first bearish Japanese

candlestick of good size, followed by the central one which must

be the smallest and whose color is not important, and the third one

corresponds to a bullish engulfing candlestick. This pattern

indicates the change of direction to the upside. The evening star is

the opposite case in a bearish direction.

Patterns of change and continuity: According to Marta & Brusuelas

(2009): The grouping of many Japanese candlesticks can form certain

graphic structures, which, once created, can have a possible

interpretation with respect to the future of the price, either of change

or continuity of the trend. The patterns most commonly used by

traders are:

• Shoulder-head-shoulder: It can be seen in the chart the

arrangement of candles, so that they form two shoulders and a

head between them. When it is discovered, the trader senses the

beginning of a downtrend.

• Inverted shoulder-head-shoulder: This is the opposite pattern to

the previous one. The same structure is seen, but the trend that

should be about to form is bullish.

• Double top and double bottom: It is discovered by observing two

highs or two lows respectively. Once detected, the beginning of a

downtrend will be expected in the case of a double top, and an

uptrend in the case of a double bottom. The distance of the next

impulse can be projected with the distance that exists between the

support and the resistance that forms the pattern.

• Triple top and triple bottom: It is identified by observing in the

price action the appearance of three highs or three lows

respectively. The distance of the next upward or downward

momentum can be projected with the distance between the

support and resistance that forms the pattern.

• Triangles: Arises from the union of two projected trend lines,

between which the price bounces. There are three types of

triangles: ascending, descending and symmetrical.

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• Flags: For its formation, it must be preceded by a rapid upward or

downward movement. This constitutes a pause in the rapid trend

that is occurring. In addition, it is formed by two parallel trend

lines that normally slope opposite to the main trend.

Quantitative analysis is used as a complement to chart analysis. It tries

to eliminate the uncertainty caused by chart analysis by using

statistical calculations. Technical analysts use tools that provide them

with valuable market information, divided into two groups: oscillators

and indicators. The difference between indicators and oscillators lies

in the fact that the former study everything related to the trend, while

the study of the latter is on variables such as the strength and speed

with which the price of a security fluctuates. (Molina Fernández,

2018b).

Some indicators and oscillators with great importance are:

• Relative Strength Index (RSI): The Relative Strength Index (RSI)

measures the strength of supply and demand. The RSI value

fluctuates between 0 and 100 depending on the strength of the

market. If it takes a value above 70 it means that the market is

reaching a ceiling and there may be an oversold point. On the

contrary, if it reaches values below 30 it indicates that the price

should be approaching a floor and there may be an oversold

point. (Núñez, 2009a). The RSI is also used in the detection of

divergences, which occur when the oscillator and the price action

behave in opposite ways. Divergences can be found bullish and

bearish, and are signals of a change in price direction. (Afi

Guides, 2017a)

• Moving Averages: they are among the most used indicators in

technical analysis. This trend indicator moves together with the

price, confirming the trend present at each moment. When the

price movement cuts the moving average, it is an indication of a

trend change. (Núñez, 2009b)

• Bollinger Bands: this indicator is made up of two bands drawn

around the price action, and its calculation is based on a simple

moving average over the closing price, which is located between

the bands obtained from the average of two standard deviations.

These principles constitute the fundamental theoretical basis of

technical analysis, from which techniques such as Elliott waves arise,

through the systematization of key concepts such as trends, market

fractality, supports and resistances. (Ruiz, 2020).

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The wave theory was proposed by Ralph N. Elliott, and states that the

market moves through impulses and reversals, collected as waves,

which form graphic patterns that comply with the principle of market

fractality. (Burguillo, 2015).

The wave theory is based on the pillars of technical analysis founded

by Dow, improving two of them. The first one states that the best way

to predict market behavior is through the study of prices; however,

Elliott develops this principle by providing a regular scheme for price

behavior. The second argues that history repeats itself, but is modified,

adding that the repetition will never be exact, because although the

price progression is governed by a standard model, it will never be

identical due to variables such as volume.

Elliott included his analytics within the conventional methodology of

analysis, using some traditional tools such as confirmation of results.

The accompaniment of wave theory with quantitative analysis is key to

good analytics, since the identification of divergences in the oscillator

division is regularly related to the end of a wave movement.

The essence of this theory consists in the formation of the main 5-3

pattern, structured in five impulses and three retracements, forming a

complete market cycle. (Roldan, 2015a)

This above pattern has three main rules (Afi Guides, 2017b) See

Appendix A, Figure 1.26A:

• Wave 2 never retraces 100%, so it will never correct to the level of

wave 1.

• Wave 3 should not be the smallest of the impulsive wave

movements.

• Wave 4 should not be support at the resistance of wave 1, as it

means that wave 4 should not enter the price level of wave 1.

To complement the analysis, it is necessary to know the Elliott degrees.

These help to improve the graphic visibility of the patterns, since they

divide the waves in size and temporality, due to the fractality

characteristic. This nomenclature is difficult to represent, since in each

degree there are several implicit temporalities, generating a

component of ambiguity for the analyst. (Prechter and Frost, 1989,

cited in Roldán, 2015b).

1- Great Supercycle: Covers more than one hundred years.

2- Supercycle: Ten to one hundred years

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3- Cycle: One year to ten years.

4- Primary: Covers from two months to one year.

5- Intermediate: From two weeks to two months.

6- Minor: Covers one to two weeks

7- Minute: One to seven days

8- Minuette: Covers from two to twenty-four hours.

9- Subminuette: One to sixty minutes.

An important aspect to highlight is the indifference that exists in the

Elliott degree that is identified, since the basic 5-3 pattern will remain

unalterable and will be appreciated in any seasonality. (Roldán,

2015c).

For Espinosa (1999a), the understanding of the main pattern of the

wave theory, its structure is addressed, which is comprised of eight

waves, namely:

1- Wave 1: This wave is usually the shortest, it is complex to

distinguish, as it tends to be confused with the last wave of the

basic pattern of the previous cycle. It is divided into five small

waves, where market conditions are uncertain and weak to make

predictions.

2- Wave 2: This is the correction of wave 1. It is divided into the three

corrections a, b and c of the five impulsive waves that make up

wave 1.

3- Wave 3: The third wave is an impulse that should never be the

smallest within the pattern. This is divided into five waves. At this

point the market begins to look more favorable to predict due to

the full confirmation of the main pattern on the chart.

4- Wave 4: This represents the correction of the previous wave. Its

main characteristic does not allow it to reach the price level of

wave 1. It is broken down into three waves.

5- Wave 5: The fifth wave is an impulse and is usually smaller than

wave 3, although there are exceptions where it can exceed it in size.

This wave is also divided into five waves.

6- Wave a: This wave corresponds to the beginning of the corrective

stage of the basic pattern. At this point a change of trend is being

defined, although there are exceptions where the subsequent cycle

is created by continuing the main trend. Therefore, this wave is the

first impulse of the next trend, so it is divided into five waves.

7- Wave b: This is the correction of wave a, but since it is ascending,

it tends to be assumed that the previous trend will be resumed,

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since there is an increase in demand in the market. This is divided

into three waves.

8- Wave c: This drives the movement downward, confirming the

trend change and causing an increase in supply in the market due

to sellers' psychology.

The above waves can be classified into impulsive and corrective.

Impulsive waves are those that generate a real advance of the price in

favor of the trend, and concentrate most of the emotion of the market

participants. These are carriers of five movements and in most cases

adopt the same form of the basic pattern. (Torres, 2012).

A fundamental principle in wave theory is the alternation rule. This is

based on the fact that when analyzing a chart one should expect

alternating movements in all wave formations. For example, if

corrective wave two turns out to be simple, such as a zigzag or flat, it

can be considered that there is a good probability that the following

corrective wave (the fourth wave) will be complex, taking the form of

complex triangles, double threes or triple threes, or any movement

that denotes graphical complexity. (Molina Barrientos, 2013).

Finally, a key concept for the solid mathematical foundation of various

technical analysis tools is studied: the Fibonacci levels. Wave analysis

is mathematically based on these levels.

To arrive numerically at these levels we start from the Fibonacci

sequence, which is a sequence where each number is the sum of the

two numbers before it, being this 1,1,2,3,5,8,13,21,34,55.... (Carpatos,

2014)

To obtain these progressions, Fibonacci ratios are calculated where the

first number of the interval chosen is divided by the next one, and in

this way progressions are obtained such as: 13/21 ≈ 61.9%, which is

the same as 21/34 ≈61.8%, 13/34 ≈38.2%; and so on until the most

important Fibonacci levels are obtained: 38.2%, 50%, 61.8%, 78.6%,

127%, 161.8%, 261.8%. (Afi Guides, 2017c)

Many Fibonacci techniques branch out from these levels, all with a

specific objective in consequence of the results they illustrate. The

Fibonacci tools most commonly used in this work are retracements

and extensions.

The retracements consist in the tracing of zones that constitute

supports and resistances, and that allow to divide the trajectory of a

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movement in different levels, based on percentages extracted from

ratios. This tool is widely used, regardless of the temporality (either in

the short term or long term), and the most used percentages are:

38.2%, 50%, 61.8%, 100%.

The Fibonacci extension consists of the projection of an impulse,

which is delimited by different Fibonacci levels, sharing the same

essence of the retracements. This tool is mainly used in the tracing of

resistances, since it allows to know how far the impulse will reach, and,

therefore, it will be possible to delimit a price range. The most known

and used levels of the extensions: 50%, 61.8%, 100%, 138.2%, 161.8%.

The application of the wave theory leads to trend analysis through the

representation of graphic patterns, in combination with Fibonacci

retracements. With its application, a probable future time horizon is

determined, however, to increase its effectiveness in prediction, it

must be combined with more advanced techniques such as harmonic

patterns.

Harmonic patterns are a tool based on the search for specific price

patterns, accompanied by Fibonacci retracements, to determine

points where the probability of a trend change in the financial market

is high. This type of analysis has its origin in Dow's theory, as it follows

the principle that market cycles repeat themselves on a regular basis.

(Carney, 2010a)

One of the fundamentals of this analysis is that price waves are related

to each other. Fibonacci levels and price patterns manifest this

relationship and provide a solution to determine the point where the

trend change will occur, and by correctly identifying where these

points are located, a prediction is made with a high degree of

effectiveness. Therefore, this analytical technique, like the wave theory

described above, has a consolidated mathematical foundation based

on the Fibonacci sequence. (Carney, 2008a)

This idea is supported by the principle of harmonicity, put forward by

J.M. Hust. In his work, the author states that, in price action, the

period of waves that are contiguous tends to have a numerical

relationship. Harmonic analysis uses Fibonacci numbers to quantify

that relationship, and determine where the moment of trend change

will occur. (Carney, 2010b)

These bases are the ones that allow defining the difference between a

harmonic pattern and a pattern of change and continuity, such as the

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shoulder-head-shoulder or the pennants. This inequality lies in the

formation of the pattern, having on the one hand a western pattern,

that its formation can be diffuse and sometimes imperceptible due to

the subjectivity of the analyst, while harmonic patterns have a

mathematical support through Fibonacci retracements.

According to Carney (2008b), a thorough understanding of the

graphical structures and numerical specificities is key to proper

prediction. The fundamental harmonic patterns that should be studied

are:

• AB=CD pattern: This pattern can occur in any area of the chart,

one of the common areas is in the Elliot corrective waves, more

specifically in the Zigzag structure. Its base is two segments of the

same size, separated by a minor movement in the opposite

direction. In harmonic patterns the appearances of Fibonacci

ratios are usually at specific points. In the case of the AB=CD

pattern, point C constitutes the correction of the AB impulse, and

depending on the percentage term that this impulse reaches, it will

result in a projection in the next impulse.

• Gartley Pattern: This pattern was first introduced by Gartley. The

function of this pattern is to detect signals of a possible future

impulse or pullback, which may lead to a new trend. For this five-

point pattern to form, among other characteristics, it must have a

very precise B point, this retracement being an exact 61.8%.

• Bat Pattern: This pattern was discovered by Carney (2001), who

describes it in his book Harmonic Trading as probably the most

accurate pattern of all. This structure represents a strong contact

of the price action on a support or resistance that can be very

strong and difficult for the price to break through. This 5-point

pattern also shares a graphical equivalence with the AB=CD

pattern, and therefore with the Gartley, the differences being in

the numerical characteristics.

• Butterfly Pattern: This pattern was discovered by Bryce Gilmore in

his Wave Trader software. Its initial output was produced with a

large number of different Fibonacci combinations in the points

that make up the structure, to which authors such as Carney

himself, have assigned more specific values, since specificity is a

key element to predict with the harmonic patterns technique.

Within this type of pattern there are several examples, which

demonstrate the complexity it can reach and are an indicator of the

progress being made in this predictive technique. To exemplify these

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patterns it is first necessary to mention their two main aspects, which

are the bullish and bearish structure of the base pattern.

From this base arise variations such as the well-known Bullish AB=CD

pattern within the CD movement of the 5-0 patterns. This scheme

arises because there are many situations and moments where in the

CD movement of the reciprocal AB=CD pattern a small AB=CD pattern

will form. These are rare and unique moments because AB=CD is

usually different, and its structure can be effective as a complement to

the other numbers of the 5-0 pattern. The same is true for the bearish

what in the opposite nature.

Variations of M and W patterns have also been created, as is the case

of the alternative Bat pattern. This alternative version, like many

others, arises from the experience where the standard Bat pattern has

not generated an adequate forecast, resulting in ineffective operations.

This consecutive trading, where analysts correct the preset values to

suit their trading, leads, after some trial and error, to the alternative

Bat pattern: an M-type pattern that uses a total XA spread of 1.13. The

BC projection uses a much higher level than the previous one, located

at a minimum of 2.0, and it is more common to find this movement

between 2.618 and 3.14.

These patterns are not the only ones that can be used in harmonic

analysis. Traders are constantly creating variations and updating

levels, seeking the maximum possible effectiveness in each prediction.

However, the patterns discussed in this section are the basis for

establishing any methodology.

Materials and Methods

In order to explain this procedure, facilitating its understanding and

use, the author considers it necessary to organize it in steps that

maintain a coherent consecutive order, with the purpose of avoiding

failures in the study and possible predictive errors. To this end:

Step 1: Definition of the sample and prediction time horizon.

The prediction time horizon is set by the time horizon over which the

operator wants to forecast, so a standard number of observations

cannot be selected. From this definition, the sample time horizon is

determined. This must be longer than the previous one, because in

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order to effectively detect Elliott waves on the chart, there must be

enough sessions to identify the cycle to which the time horizon

corresponds, and if this is in the middle, then the previous one must

also be detected. This generates sample time horizons that can be of

one or two years to analyze short terms, or seven or eight years for

forecasts with a longer predictive horizon.

This will allow us to have enough information about the historical

movement of the price, which translates into a more effective forecast.

The choice of these timeframes, as well as the operation in the

following steps, is made using the Japanese candlesticks as a tool to

analyze the chart, due to the amount of information they provide, and

the visual facility they provide, allowing a better appreciation of the

structures.

Step 2: Definition of the temporality of the sections.

In this step the temporality to be defined for each candle is selected,

since the level of detail of each type of candle varies, and therefore its

choice must be given according to the time horizons of the sample and

the prediction that were previously selected. In the specific case of this

research, three temporalities will be used: daily, weekly and monthly,

to demonstrate the effectiveness of the procedure in these different

time periods, due to the use of the fractality principle that is present in

the proposed tools.

Step 3: Identification of the main Elliott pattern.

The trend analysis of this procedure will be reflected in the discovery

of the main Elliott 5-3 pattern. With this, it will be possible to record a

historical price path and the current trend experienced by the price.

The analyst will be able, through the properties of the waves and the

principles of Elliott's theory, to have a notion of the future direction

that the pair will take, which allows the trader to also measure the

length of the trend. This pattern is identified by observing the impulses

and retracements of the price action, and the chart pattern in which

they appear. Waves 2, 4 and C, which constitute retracements, need

the Fibonacci retracement for validation, as movements that do not

reach an important area of this tool cannot be identified in this way.

Step 4: Identification of the possible harmonic pattern.

Once the trend has been studied according to Elliott's theory, we

proceed to the graphic search for the existence of a harmonic pattern

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that may serve as a justification for the price movements interpreted

in the chart during that period. In addition, the possible presence of a

harmonic pattern in the final part of the price path is investigated,

since these patterns tend to appear at the moment when a change in

the direction of the price is imminent, so their detection is key to define

the beginning of a momentum or a retracement. If the price is in full

momentum, these patterns will not be a relevant resource, however,

when the price starts to oscillate, they can be identified, so we must

look for M or W shapes in the price action, depending on whether the

main trend is bullish or bearish, respectively.

Step 5: Chartist and quantitative analysis of the sample time horizon.

In order to accomplish this step, chartist tools of western analysis and

the interpretation of Japanese candlesticks are used, which in many

cases will be a confirmatory signal of the future price movement

predicted in previous steps. Also highlighted are the supports and

resistances that will be used in their traditional form to measure the

price graphically. These can be identified in two ways: the first is by

graphically observing their primary function, being the ceiling or floor

of the price on a repeated number of occasions, which validates the

support or resistance in question; and the second is by means of

Fibonacci tools, either retracement or extension, which gives levels

where the price is likely to change course.

As for quantitative analysis, two traditional tools will be used: the RSI

and moving averages. The RSI, as an oscillator, is used both in its

function to detect possible overbought and oversold points, which are

possible changes in the direction of the price, and in the identification

of divergences in case they exist, being both uses confirmatory of the

results of previous steps. The moving averages, two of periods 20 and

9 are used, also help to confirm possible trend changes through their

crossing.

Step 6: Predictive Range Calculation .

Once all the chart details have been analyzed, the supports and

resistances have been plotted, and a logical conclusion has been

reached about the future price movement, it is time to delimit the

range in which the price action will move over the time horizon. For

this purpose, the most probable supports and resistances are used,

according to what is established by the Wave Theory and the Fibonacci

tool, thus leaving a probable prediction range.

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After the theoretical exposition of the proposal, we proceed to the

explanation of the same in three illustrative examples, which will

revolve around the current prediction of the price of the EUR/USD

pair. During this subheading, predictions in different timeframes will

be addressed. Therefore, predictions will be made in daily, weekly and

monthly timeframes, emphasizing mainly in the first one, since due to

the fractality principle the analyses in these timeframes will share

elements and conclusions in common.

Results

This time frame is the one most commonly used by traders to predict

the price of a currency pair, and most of the procedures are geared

towards it.

First, the time horizon is delimited, which will be the one

corresponding to the forecast. This comprises the 30 days of July, so it

is between July 1 and August 1, 2021. On the other hand, the analytical

period to identify the main pattern of the Elliott waves will comprise

between March 12, 2020 and June 26, 2021, deepening more in the

analysis in the last six months approximately to the temporary horizon

in search of harmonic patterns, reason why a second moment of study

more in depth will be from January 6 to June 26, 2021.

The time frame to be used in this case will be daily Japanese

candlesticks, in order to demonstrate the effectiveness of this

procedure in this type of time horizon.

Next, we proceed to identify the basic 5-3 pattern of the last cycle. This

main Elliott pattern starts on May 18, 2020. Its beginning can be

traced back to that day, because before it is the corrective movement

of the previous cycle, which presents a triangular contraction

structure.

This pattern started when the price was at 1.0820 and progressed until

its first five waves reached January 6, 2021. Throughout this pattern

the price progressed as follows: impulse wave 1 is displayed when the

price reached 1.1382 on June 10, 2020.

The second wave was confirmed on June 22, when the price was close

to 1.1176. To validate this wave it is necessary to apply Fibonacci

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retracements. By applying it, it can be seen that this wave crosses the

38.6% zone, confirming it and initiating impulsive wave 3.

Figure 1. Checking the validation of the corrective wave 2.

Impulsive wave 3 ends on September 1, 2020 when the price reaches

the 1.1994 level. This is validated by the fact that theoretically it should

never be the smallest wave of the pattern, and being smaller than the

first wave it consolidates.

The previous wave gives way to wave 4, which is a retracement. Wave

4 reached 1.1615 on November 2, 2020. When applying the

retracements to validate it, it can be seen that it crossed the 38.6%

level, and was about to reach the 50% zone, which confirms the

creation of the fourth wave.

Figure 2. Checking the validation of the corrective wave 4.

Finally, the fifth wave comes to form on January 6, 2021, reaching a

high of 1.2350, thus concluding the five impulsive movements of the

pattern that follow the fundamental principles established by Elliott in

terms of length and path.

We then proceed to identify the ABC corrective structure of this

pattern, which in this case has not yet been fully defined. Wave A is

completed on March 31, 2021 when the price declined to 1.1715.

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To validate wave B it is necessary to apply the retracements to check

the level it reached. After this operation, it can be seen that on May 25,

2021, the price action crossed the 78.6% level when the price was at

1.2253.

Figure 3. Checking the validation of corrective wave B.

At this moment the price action is in a transition period, between this

cycle and the next one. It is at the creation of the end of the corrective

structure. Everything seems to indicate that the formation will take a

simple zig zag structure, being the most common, so we can expect in

the coming months a fall in the price as a result of the complete

conformation of the trend change.

Looking at the chart, it can be seen that on November 3, 2020, the

price action begins to form a Bat pattern when the price was at 1.1641.

The structuring of this type M pattern, is observed when the price

reached 1.1641 forming the initial point X on November 3, then the

price rose to 1.2337 on January 6, 2021, creating point A, then fell to

1,1956 on February 4, forming point B, then rose to 1.2174 on February

26 to form point C, and finally on March 30, 2021, the price fell again

to 1.1714, thus creating point D of the pattern and completing the

XABCD structure.

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Figure 4. Bat pattern. Daily temporality

The formation of this pattern is relevant to justify the creation of the B

retracement wave. In addition, its appearance during the formation of

wave 5, being associated with trend changes and important price

deviations, is a considerable signal of the installation of a possible

downtrend during the next months, which confirms the conclusion

reached with the Elliott wave analysis.

In addition to this pattern, no other pattern was found in the last six

months of the analysis period that could more significantly validate the

conclusion from these steps.

Looking at the chart, we can see that since the formation of wave B, the

candlesticks have strongly reflected the bearish aspirations of the

market. On May 26, 2021, when the price was at approximately 1.2253,

a bearish engulfing candlestick was created, which impacts the sharp

decline in the price. In addition, on June 11, 16 and 17, engulfing

candles were formed, confirming the market's attitude towards the

sell-off.

Figure 5. Bearish engulfing candles. Daily seasonality

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The next thing that can be seen is a small move against the downtrend,

which may be a product of the same retracement of the impulsive wave

C, a phenomenon that occurs due to the principle of fractality. The lack

of size in the body of the final green Japanese candlesticks indicates

the eventual fall of the price.

The next thing to be done is the plotting of supports and resistances to

generate those floors and ceilings that will be fundamental in the

conformation of the range. The Fibonacci extension will be used to plot

the supports, which will project the possible length to which the

impulse of wave C can reach. When using it, it can be seen that the

most expected levels to which the price action can reach in its descent

are 78.6% and 100%, which places the price at 1.1783 and 1.1653

respectively, so supports will be plotted at these levels.

For the plotting of resistances, the last downward movement is

adopted as part of the structure of five small impulses that have the

impulsive waves, because when measuring the retracement of the last

movement, it is observed that it has not yet reached the level of 38.6%,

so there should still be a few sessions for the price to rise until it begins

its descent following the downtrend. Both the 38.6% level and the 50%

level, which are located at 1.1988 and 1.2032 respectively.

On April 28, a bearish divergence is seen, which is another

confirmation signal of the downward price movement on May 26 to

start wave C. These divergence signals are usually quite reliable for

traders.

Regarding the overbought and oversold points, an overbought point is

observed on June 18, pointing to a rise in the direction of the price.

This oscillator confirms the analysis of all the previous steps, because

in addition to providing clear indications of the creation of wave C, it

also generates an overbought point to warn of the small rise that the

market has experienced.

By properly configuring the periods of the moving averages, we can see

how on June 9 the price was at approximately 1.2180, a crossover of

the moving averages occurred, representing another signal confirming

the price decline in the wave C formation.

The nine-session average is crossing the price downwards, while the

20-period average remains above the price action, constituting a kind

of resistance, which coincides with the previously marked resistance

at 1.2032.

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Figure 6. Moving average crossover. Daily seasonality

Finally, it is time to establish and state a predictive interval based on

all the previous steps. First, it is known through Elliott wave analysis

that the price action will decrease, establishing the end of the current

cycle and the beginning of the next one.

The observation of wave C, is in the process of creating its

retracements, so it is necessary to be cautious in terms of prediction,

as it is not 100% clear how far this upward momentum will go.

All this leads to the conformation of two possible continuations of the

price action, as it yields two perfectly possible scenarios. The first

scenario is the most expected by the author, in which the price should

rise in the coming sessions, and then start its total decline to complete

wave C and define the simple zig zag corrective structure.

A second scenario is composed by the rapid decline of the price

without generating bullish candles in the next sessions. This completes

the formation of wave C, initiating the downtrend and starting the next

cycle.

For the conformation of the July quantitative forecast, both scenarios

share 1.2032 as the range high, drawing from resistance found at the

50% level of the Fibonacci retracement of the last impulse, due to the

need to leave room for upward movement for price action.

In the case of the low for the first and most conservative scenario, this

is selected at the author's criteria at a level of 1.1783, which constitutes

the support corresponding to the 78.6% level of the Fibonacci

extension, applied to project the impulsive wave C. This leaves the

continuation in a predictive range between 1.1783-1.2032.

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In the second scenario, the price falls faster, so the low varies from the

first. In this case, the support created by the Fibonacci extension at the

100% level, which is located at 1.1653, is chosen. Therefore, the second

predictive range is between 1.1653-1.2032.

Figure 7. Exchange rate prediction.

Conclusions

The proposed procedure was developed in six logical steps, namely:

definition of the time horizon of the sample and of the prediction,

definition of the temporality of the sections, identification of the main

Elliott pattern, identification of the possible harmonic pattern, chartist

and quantitative analysis of the time horizon of the sample and

calculation of the predictive range. The proposed procedure is

established on the basis of technical analysis tools, which allow its

application in different time horizons, due to the use of the fractality

principle. It yields significant values for forecasting the future trend of

the EUR/USD exchange rate.

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