EURUSD: Distribution of Consolidation?
When I look at a Daily Chart of EURUSD the first thing that pops into my head is DISTRIBUTION. Any time a market goes sideways, it is either distributing before a change of direction, or it’s consolidating before a resumption of the current trend. Either behavior is marked by wide price swings in both directions identified by candles of both colors in an overall sideways range. See EURUSD Daily chart below. Such a market is like quicksand for trend following traders. Trend following meaning a method where a trader enters into a position in-line with the higher time frame trend. If the Weekly trend were higher the trader would take a buy signal on the daily chart, for example. Or if the daily trend was higher the trader would seek out a buy signal onthe 240 minute chart. The idea, and a good one, is to go along w/ the overriding trend. This is also called directional trading and it’s ideal for the type of markets we’ve been in the eight years or so, and we see no reason why this would/could change.
The markets will go through periods though where they pause and consolidate the previous move, or even pause and distribute, prior to a reversal. From a trader’s perspective it’s never a good idea to guess which way a market will go following a sideways, or triangular formation, though you would have statistics on your side by leaning in the same direction as the trend prior to the pause.
The bottom line for me is until EURUSD clears the October highs — the white line onthe chart above – I’m more interested in selling rallies, and would even say that if we close below 148.40 — the yellow line on the chart –I’d pass on buy signals in favor of the short side.
One thing I can say with a fair degree of certainty is that in a sideways markets – aka counter-trending markets — such as the one we have been in for the past 3 weeks in le Euro, you are going to be better served by trading lower time frame charts, and not waiting for the higher time frame to confirm. And therein lies the art of trading: knowing what time frame to trade, and when.
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Jay Norris
www.trading.com
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