Previous Analysis From Last Month

A few weeks ago I wrote this blog post discussing the low volatility of the EUR/USD pair, and showed how it was trading in an ever decreasing channel.

When you get a tightening trading range and low volatility with the exponential moving averages and bollinger bands all tightly packed together, you often get a strong breakout in one direction or the other when the price breaks out of this channel, and this is exactly what happened.

Downward Breakout During August

At the start of this month, the price finally broke downwards out of this channel (and below the outer bollinger band), closing the day at 1.1586, which we highlighted at the time on our Twitter page and our new Instagram page.

The price then continued falling during the following three trading sessions, before bouncing back for a few days. However you will see that the previous trendline acted as resistance and traders used this resistance level to open new short positions and drive the price downwards again. So there was another opportunity to go short if you missed the initial breakout.

Subsequently, if you had opened a short position at the close of the initial breakout candle, you could have yielded over 200 points so far (if you had placed your stop loss above the trendline or above the high of the breakout candle, for example), and this downwards breakout could yet yield a lot more points.

Profitability of Channel Breakouts

Whether you took this particular trade or not, I just wanted to highlight how profitable these breakout trades can be if you are patient enough to wait until a clear breakout has occurred.

Yes it can be frustrating when one of your favorite pairs is trading in a narrow trading range because the short-term moves are hard to make money from, but if you switch your attention to the daily charts, you can see some large moves on occasions, and this is one example.

Lower Volatility in Summer

All of the major currency pairs tend to see a large reduction in volatility during the summer months, with smaller price moves every day, and the EUR/USD pair is no exception.

If you look at the average true range of this particular pair (using the ATR indicator), you will see that it has dropped to around 65 points right now at the end of July 2018, which makes it fairly hard to trade for any short-term traders.

Narrow Price Range

As well as having small price moves, it has also been trading in a narrow, sideways price range with no clear direction.

The 20, 50 and 100-day EMAs are all very close together and the Bollinger Bands are also very narrow, which helps to confirm this narrow trading range.

More importantly, if you draw two trendlines joining the highs and lows of the recent trading range, as shown in bold in the price chart below, you can see that the price is trading is an ever decreasing trading range, which is often the pre-cursor to a major breakout.

Potential Trading Opportunity

Subsequently, this represents a possible trading opportunity because if the price breaks strongly upwards or downwards (and closes outside this range and outside the Bollinger Bands on the daily chart), this is potentially a good time to open a new position and capitalize from this breakout.

(Disclaimer: These are just my own thoughts and ideas, and it doesn’t represent financial advice in any way. Please do your own research before opening any positions.)

A Word of Warning

Trades like these are often very profitable because everything is in place for a strong breakout (narrow EMAs, narrow Bollinger Bands, trading within trendlines, etc), but you have to be careful during the summer months because volumes are lower and sometimes these breakouts don’t have the momentum to be sustained for very long.

It will be interesting to see what happens anyway because the price has to break out of this ever decreasing price range very soon, and so there could potentially be a big move upwards or downwards in the coming weeks if there is some momentum behind this breakout.