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I once heard David Bowden say that he would often wait for the market to give him a “first leg” or “first range out” from a top or bottom before looking to trade the move. The comment surprised me, as I always thought that the whole idea of trading was to get in as close to the market turn as possible.
But over time, I realised what David was waiting for. He was letting the market give him a reference range, which he could then use as a “yardstick” to measure the rest of the ranges in a move. He called this technique “The First Range Out”.
Let’s look at a current example on the US Dollar/Japanese Yen Currency Pair, (the code is FXUSJY in ProfitSource). Chart 1 below shows the first range out the US Dollar/Japanese Yen made from the current low on October 7, a range of 248 points.
Chart 1
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Now that we have a range to work with, we can measure future ranges against this range. Chart 2 below shows the next range up.
Chart 2
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We can see that the second range up was 252 points, almost an exact repeat of the first range out.
Having seen this first range out repeat, we would certainly be watching the next range up, to measure it against the first range again. Chart 3 below shows the next range up.
Chart 3
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The third range up was just a fraction shorter than the first range up, at 227 points. Gann spoke of markets moving in three or four sections before having a correction, and this is what we have seen from the Dollar/Yen in this case.
Chart 4 below shows that the market did indeed have a pullback after this up move. However, we now need to watch the market to determine whether we have seen the end of the move up, or whether we have simply seen the end of the first leg up on a larger scale.
Chart 4
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Time will tell whether this market has more strength in it. I know there is a lot of talk about the demise of the US Dollar, but I think we may well see this market run up at least into early December before yet another fall in the US Dollar / Japanese Yen.
Those interested in getting to know this technique a little better would do well to go back over the last three years of action on the US Dollar /Japanese Yen (FXUSJY in ProfitSource) and measure the sizes of the moves. Use your daily, weekly and monthly charts as a starting point.
Be Prepared!
Mathew Barnes
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