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Therefore, I wanted look at how using the monthly highs and lows as stops would work in the Euro FX futures. For over 25 years, I have found that the OBV is a very useful tool for forecasting the moves in the currency markets. In this example, I will be using the weekly OBV and its weighted moving average as a trigger.

The chart covers the period from March 2009 through March 2012. The last seven months have been particularly interesting, as the euro came under pressure last summer when concerns grew over Greece’s debt burden.

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The OBV dropped below its weighted moving average in June, and the lower lows in July started a new downtrend in the OBV. At the end of July, volume rallied back to its now-flat weighted moving average, which is a classic topping formation. The first week of August, the uptrend in the OBV, line c, was broken, confirming a new sell signal.

The euro opened the following week at 1.4256, and a stop at 1.4620 (0.005% above the July high of 1.4547) would have been used on short positions. The euro came quite close to this stop when it made a high on August 29 at 1.4553.

The weekly OBV stayed below its weighted moving average for the next seven months, as it formed a series of lower highs and lower lows until the week ending March 23, when the weekly OBV moved back above.

FX traders should also note that the weekly OBV did a good job of catching the euro’s decline from November 2009 through May 2010. Even if trading the spot FX market, keeping an eye on the volume in the currency futures is a good idea.

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On the daily chart of the euro futures, the break of weekly OBV support and the confirmation of a new downtrend is identified by point 1. Those who use the OBV will not be surprised to see that the euro continued to edge higher for two weeks before dropping sharply. The weekly OBV can often be a very good leading indicator.

For the next five months, the euro stayed well below the stop (red line), as calculated from the prior month’s high, which is indicated on the chart.

Then, on February 9, 2012, the euro had a high 1.3325 (point 2) and just above the stop at 1.3301, which was derived from January’s monthly high of 1.3237. After a sharp setback, the euro continued to rally, eventually reaching a high of 1.3487.

As noted in this April 4 column, the technical action now suggests that the rebound in the euro is over and that the rally from the January lows was just a pause in the downtrend. The flag formation is consistent with a continuation pattern.

Using the monthly stop method, those short could use a stop at 1.3457, which is calculated from the March high of 1.3391.

For some FX traders, a stop half of one percentage point above the monthly high might be too wide, and in this example, a stop that was one quarter of a percent above the month’s high would not have altered the results. For April, that would mean a stop of 1.3424, which is 33 pips lower.

NEXT: An Alternative Way to Apply This Concept