Join the NASDAQ Community today and get free, instant access to portfolios, stock ratings, real-time alerts, and more! I wrote this article last year and it is worth repeating plus an addendum as the price action around EURUSD 1.

Do you ever wonder why you turn on your screens and it is often hard to figure out which way the forex market will move as it appears to be in balance? Have you ever thought about why currencies settle into tight ranges with interest on both sides before making the next move? Have you noticed how a currency gets stuck in a tight range in one center and needs to see another center open up to break from that range? All markets seek equilibrium.

It is a dynamic term as equilibrium does not last long but this does not stop the forex market or any market for that matter from being in a constant search for it.

This is why you see a currency, for example, make a move in one direction and then settle into a tight range as buyers and sellers come in on both sides. Equilibrium is a period of time when supply and demand comes into balance. It is a time when buyers and sellers of a currency offset each other in a tight range.

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In other words, markets, such as forex, are constantly searching for new levels of equilibrium to bring buyers and sellers into balance.

One reason I am bringing up this topic is that it is rarely talked about but it is the dynamic of any market. If you trade during a period of equilibrium you are either trading a tight range or betting on the next directional move.

If you trade while the market is seeking equilibrium you are trading when there is momentum. If you think about the market in this way you can put price action at any point in time in in perspective.

Equilibrium Trading Strategy

You can also avoid getting fooled by a currency appearing to be bid when it is in an offered market and vice versa. In any case, be aware that all markets are in a constant search for equilibrium. The following one hour EURUSD chart is a good illustration of a market that has reached equilibrium.

As the chart shows, over the past few days EURUSD has traded in a compressing range around 1. As we all know, this equilibrium will not last with volatility likely to follow, one way or the other, depending on the outcome of the never ending Greek debt talks. It is clearly setting up to be the calm before the next storm.

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