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.