EURUSD: Rough Price Action Inside Range. Watch For Extremes.

EURUSD update: With no new drama coming from the German or Italian political situations, this market sits in the middle of a newly established technical range. Even though indecisive markets are characterized by their randomness, they still offer opportunity, if you know what it looks like. In this article I will explain what needs to happen in order for a swing trade long to be justified, and what target expectations are appropriate.

A Range Bound Market Is A Balanced One

Balance in a market occurs when buying and selling pressure is more or less equal. This agreement between the two forces usually expresses itself as a range bound pattern like a triangle, or even an imperfect rectangle on a chart.

What makes these type of environments difficult is the price randomness. Setups often lack follow through and break outs tend to fail. And this is where the opportunity is.

Opportunities At Extremes

The middle of a range is the absolute worst place to trade. Price action is completely random and there is no structural advantage to taking any setups in this area. In the EURUSD that would be where it is trading now. 1.1708 is a broad .382 support relative to the entire bullish structure dating back to the 2016 lows. Levels of this magnitude comes with a wide margin of error.

If randomness dominates the middle, then the extreme prices are where probability offers an advantage. Like I mentioned earlier, breakouts tend to fail which means extreme prices offer higher predictability. This is the mean reversion game and is better quantified by statistics experts, but a range bound market is where this concept can be capitalized on in its simplest form.

EURUSD: Range bound markets and most random in the middle and much less at extremes.

For EURUSD, this is where the reversal zone boundaries carry the most weight. They contain price areas outside the range that offer the highest probability of price reversal. Which means IF this market tests lows below 1.1500 and prints a reversal candle, that would be an opportunity for a swing trade long. And we will be watching closely for that.

Remember Drama Is A Catalyst

Can price break below the 1.1438 reversal zone boundary and keep going? Yes, and that would be the continuation of a trend, but until that happens it is reasonable to expect break outs to fail and the range to hold.

If a long signal appears off the lows, the reasonable target for such a position would be? The middle of the range because that is where the market naturally finds balance in an environment like this.

Keep in mind, in order for price to be motivated enough to reach such levels, it will require a catalyst. Do not lose site of the price structure during these dramatic events. The overreaction to the drama that comes out of Germany and/or Italy is what can motivate orderflow enough to reach such irrational levels.

Catalysts affect the short term perception of the herd. Click here to read a recent example of the GBP where price reversed on “a vote” by the Bank of England’s chief economist to raise interest rates in August. Meanwhile so much can change until then that this vote does not justify its price reaction.

We will be watching the low 1.1500’s and range above the 1.1438 reversal zone for bullish signs like a pin bar. In this environment that is where patterns which offer the most favorable probability can appear.

Questions and comments welcome.

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