2 Forex pairs to watch

One of the things I look for to spot potential trading opportunities is
Bollinger Bands
, specifically how wide they are. When the Bands get
narrow, they indicate a market in “trend-ready” mode. By that I mean the
market in question has consolidated enough (which is how the Bands narrow) that
it has become ready to make its next significant move. The narrower the
Bands get, on a relative basis, the stronger the ensuing move. (For more
information on this set-up, see this short article:
Identifying Budding Trends with Bollinger Bands.)

On an intra-day perspective, two currency pairs are showing narrow Bollinger
Band width, implying some fireworks forthcoming.

EUR/JPY

The first pair to focus on is EUR/JPY. As the hourly chart below shows,
the cross has been consolidating for about the last 24 hours. As a result
the Bollinger Bands have gotten quite narrow.

Look to the left side of the chart. It shows the last time the Bands
got very narrow. Notice how the market moved sharply lower. It fell
about 2.5 points in around a day’s time. That’s a nice short-term move if
you can catch on near the start. As of this writing (9:00am ET), the Bands
for EUR/JPY have gotten down to a width of about 50 pips. That isn’t quite
as narrow as in the previous instance, but they do appear to still be narrowing.
The indication there is that we should see a decent directional move starting at
some point today.

USD/CAD

The Bollinger Bands for USD/CAD have also gotten quite narrow. The chart
below shows that they are even narrower than they got before the sharp rise from
1.1500 to 1.1650 in the latter part of last week.

This time around the Bands are around 30 pips wide. That is very
narrow. What can often happen when this sort of thing takes place is very
sharp, but short moves. It is not usual for a market with extremely narrow
Bands to explode in one direction or the other, making a very violent move, only
to see it run out of steam relatively quickly. This may or may not happen
in USD/CAD. Watching the Bands could help you make that determination,
though. USD/CAD does not tend to trade far outside the Bands, upper or
lower. If it gets way outside them, it will stall out and/or pull back
nearly every time.

Direction

The Bollinger Band Width can be a very useful tool in picking out markets ready
to move. It doesn’t help much in determining the direction of the eventual
move, however. For that we have to look elsewhere. My own tendency
is the look at the existing trends in the market. In the case of EUR/JPY,
the market has been weak of late. My feeling is that the cross probably
has at least a littler more downside to it. As a result, I would be
expecting a resolution lower to the narrow Bands. The reverse is true for
USD/CAD, which has been rising recently.


John Forman
is a near 20-year veteran of trading and investing
across a wide array of markets and instruments. He
is author of the
forthcoming book,


The Essentials of Trading: From the Basics to Building a Winning Strategy

(Wiley, April 2006). His analysis and market comments
have been found in the financial news media across the world and he has
published dozens of articles on trading methodology and analytic technique. To
learn more about John’s research and trading activities, visit the


Anduril Analytics website.