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The forex markets are setting up for some very interesting action to start the new year. I’m not referring to developments out of Europe or anything like that, though certainly those sorts of things can be contributory. In this particular case I’m talking about the technical set up of some of the major currency pairs.

I’ll start off with USD/JPY to provide the first example. Take a look at the daily chart below and notice in particular how narrow the Bollinger Bands are at present.

The lower plot of BWI (Band Width Indicator) tells you just how narrow the Bands have gotten in recent days. The current BWI level – which indicates the width of the Bands relative to the 20-day average – is the lowest it’s been in more than 2 years. That tells us USD/JPY is setting up for some kind of violent move. Notice what happened at the end of October and early November the last time BWI was down around this same area. In that case we saw a fake break down with a very rapid reversal. This time perhaps we see the same, or maybe we get a more unidirectional trend move. Either way, as a market participant you need to be ready for increase volatility.

We can see narrow Bands in other places, like AUD/USD…

… and GBP/USD…

As well as among some of the crosses. The JPY crosses almost uniformly have very narrow Bands, and we can see the same thing in the likes of AUD/NZD, with others heading in a similar direction.

In these additional cases, the BWI levels aren’t quite as extreme as they are in the case of USD/JPY, but they are still low enough (and still falling in some places) that they need to be taken seriously. They’re telling us to be ready for new trends to develop in the new year. Given the mainly range-bound action we’ve been seeing in many places for a while, this can’t be a major surprise. Just how aggressive the markets get, however, could be.

Now is probably a pretty good time to be looking at your trading and/or investing strategies to see how expanded volatility, and potential strong new trends, could impact your performance.

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This entry was posted on Thursday, December 29th, 2011 at 10:57 am and is filed under Forex Trading, Pips Weigh In. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.