Directional Channels

The FX-market will normally oscillate between range bound and trending conditions a few times throughout the year. We may see the market spend a relatively low or high amount of time in either market condition, depending on the fundamental picture and economic climate of each currency within the pair. However it is safe to say that the FX-market has the tendency to remain in a range bound condition the majority of the time due to a number of reasons including the extremely high amount of volume that passes through the market every trading day. With that said, although boring, these trading ranges can offer a number of clues as to the future possible move of the market. The following (daily) chart shows the EURUSD pass through a number of trading ranges or trading channels, broken up only by an occasional trend, which tends to occur and terminate quite quickly. Note how the subsequent breakout was forecasted by the direction of the preceding channel. In other words, each trading channel developed a bias either to the upside or downside, which eventually broke out to a new trend in that same direction. What is the lesson? We should make every attempt to trade in the same direction as the overall trend. By placing our trades in the same direction as the overall trend, we stand a good chance to participate in the subsequent breakout if it happens to occur while we hold a position open.