Whilst I normally write about trade setups that are imminent I thought today I would share with you a different perspective on looking at setups and discuss how looking at some different timeframes can give you a clearer picture on the trends that are at play. With the news of pro-bailout parties receiving higher ratings in the polls the opinion of the market towards the Euro has swung towards the positive since the opening of trade this morning. I am far from convinced that this will provide any major change in market direction for this currency but if you are a very short-term trader there may be some merit in taking a step back and looking at whats going on around you.
The chart below is far from long term but for people who live in 5 minute charts it will look as though it covers the chart of all time. What I have plotted on here is a simple variation on the Bollinger Bands. Instead of 20 periods with +/- 2 standard deviations this one uses 50 periods and 1.25 standard deviations and can be a fantastic addition to your trading toolkit.
As you can see from the chart – the 50 period moving average has been respected by the price on a number of occasions – I also wish it caught the price every time but sadly for traders this isn’t the universal indicator either.
In addition to this, and I would say of greater interest to hardcore trend followers, is the way in which price has slid down the outside of the 1.25 standard deviation bands that envelop the moving average. Despite the fact that so many traders try to use Bollinger Bands for mean reversion trades this is exactly the type of behaviour that you want to see in a strongly trending market.
Price on this chart has now moved comfortably back within the bands so the trend has entered into a phase where mean reversion is a distinct possibility – because conditions have now changed and recent confidence in a bearish direction has been eroded. I will be closely watching this chart to see if the rate gets to the 50 period moving average and if this level is then respected. If it is this may represent a great opportunity to rejoin the trend and likely to be able to do it with a nice close stop loss to go with it.
Not to worry if price breaks through though – there are some really interesting levels not far above this one which are of equal interest which I will address when and if we get there.