The Currencies Are Poised For A Breakout

Cho Sing Kum
21^st September 2004

The possibilities are high that the foreign exchange market will witness a period of increased activities in the days and weeks ahead if current price action is a guide. The major currencies (except the Canadian dollar) have been trading sideway for the last few months. While browsing the price charts with the naked eye will no doubt reveal this but what the naked eye cannot see is that this sideway move is about to end. And end it would with a bang… I mean BREAKOUT.

Why is it that the sideway move is about to end? You may be asking.

The Turtles have been taught twenty years ago that trend follows consolidation and consolidation follows trend. This is an important part of their trading strategies and is the concept behind the Last Theoretical Trade Filter rule that helps in deciding whether to take or drop entry signals.

John Bollinger, in his book Bollinger on Bollinger Bands in chapter 15 on The Squeeze, wrote that the BandWidth indicator “demonstrates quite clearly the most important aspect of this theory of volatility, that low volatility begets high volatility, and high volatility begets low.” This indicator, when used in conjunction with the Bollinger Band indicator, identifies The Squeeze.

Of the major currencies, the one with the tightest sideway range is the Japanese Yen. I will then use this in the chart examples. Now remember that similar patterns of the Squeeze are also present in the major currencies. Except for the British Pound where the Last Theoretical Trade Filter will filter out the next trade, the signals in the Euro, Swiss Franc, Japan Yen and Australian dollar (if it breaks on the upside reversing the current short) are considered valid Turtle entry signals.

The chart in Figure 1 shows what the Squeeze looks like on the Japanese Yen. While there have been many squeezes in the past, it is rare that a squeeze would look like the present which is due solely to the very tight range in the last one month.

I will not discuss the details of The Squeeze so I strongly advise you to read the book. Suffice to say that a break out of this squeeze is what John Bollinger calls an “explosion” in the Bollinger Band. Usually, the direction of the breakout is the direction of the emerging trend. But you must be careful of the “head fake” which can be costly.

The Turtle indicators are shown in Figure 2. Notice that there is presently no position. Turtle System 1 is waiting for a breakout. Since the Last Theoretical Trade is a loss, this coming breakout is a valid Turtle entry. Obviously, with the Turtle system, there is no indication as to which side the breakout will be. Just get in whichever side the breakout, with proper position size and money management of course.

In other words, your entry orders (first and subsequent pyramids) should be ready on both side of the breakout channels.

Let’s see how this goes.

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