7/31/2018: Currency Ranges Remind of 2014 Conditions
A quiet currency market in July isn’t unusual but this July was unusually quiet. The EURUSD monthly range was just 1.85%. That’s the smallest monthly range since September 2016 (1.82%). The only smaller monthly ranges since EURUSD began trading are April and June 2014 (1.68% and 1.42%). The AUDUSD monthly range was 2.34%. This is the smallest range since August 2014 (1.45%). In fact, there were a cluster of small range months in 2014; the May, June, July, and August ranges were all less than 2.5%. The NZDUSD range for July was 2.51%. That’s the smallest monthly NZDUSD range since February 2002 (2.11%)! There is a reason I’m noting these small monthly ranges…stay with me.
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Markets oscillate between bull and bear periods, but also between range and trend. Generally, small monthly ranges indicate a range market while large monthly ranges indicate a trending market. Think back to those stats, specifically the EURUSD and AUDUSD figures. Those small monthly ranges in 2014 gave way to an extraordinary USD bull move. In other words, range gave way to trend. I don’t know if the next move is towards USD strength or weakness but I do know that tight ranges tend to precede directional moves. Catching a trend early is not easy but it helps to know that conditions (tight ranges) are in place for one to emerge.
Of course, there are plenty of opportunities to trade range too. I’m prepared to accept trend conditions but must live with range conditions at present. Flipping from bull to bear in short order isn’t for everyone but for those that wish to trade a range actively, utter the following; ‘embrace the chop’. This phrase helped a great deal in July trading. Forget about the big sexy move and trade what’s in front of you. Practically, this means identifying levels beforehand and fading those levels (selling strength and buying weakness) with tight stops. Tight stops are key in these tight range conditions because breaks from tight ranges can result in sharp directional moves. Relating to physics; potential energy is to range as kinetic energy is to trend. Maybe in a few months, I’ll be writing about extreme trend conditions.