TRADING STRATEGY
we want to trade EUR/USD. On occasions when we keep trades open overnight it is because the day closed on a really strong or extremely weak note and we expect follow-through ahead of the London open. Knowing by how much the pair typically moves in the U.S. and Asian sessions we can place our protective stop at a distance from the market that allows for normal volatility without stopping us out.
EUROPEAN SESSION
We trade 30-minute candles because most economic data is released either at the bottom or at the top of the hour. If economic data surprises in either direction the market will quickly discount that information and we want to trade the imbalances in supply and demand as the market adjusts to the new reality. Trading 30-minute candles we have never missed an opportunity to trade the news and it has never failed at signalling any bigger intraday trend.
Trade zone #1 is between 08:00 – 09:30 and most of the time when we see the wick of the daily candle drawn. Remember the old adage, “Te amateurs open the market and the professionals close it”. On most days we will stand down during this time segment to see how the opening flows resolve themselves. However, we will buy the market any time aſter 8:30 if the lows of the Asian session have been tested and rejected followed by a quick reversal candle that takes out the high of the range. By the same token, we will sell the market if the highs are
tested and rejected followed by a move through the lows of the overnight range.
Trade zone #2 is between 09:30 – 11:30 and a big window of opportunity when the market has usually rejected either the upside or the downside and started to draw the body of the daily candle. Tis is where we get busy and try to catch as much of the ATR as possible. At the time of writing this article the 50-day ATR is 111 pips. Armed with this information a trader who does not know anything about the market can still make a fortune just by being able to identify a reversal and then shoot for the full ATR in the opposite direction. If you look at the market this way it is just a numbers game where it will cost you a pip to play with 111 pips of potential profits for anyone who nails the bottom and the top.
In the example in chart 1.1 price traded to a high of 1.3100 before
FX
coming back to break the lows of the Asian range at 1.3060. By then we had covered 40 pips, clearly reversed the order flow and the daily candle just turned red. Assuming we had seen the high of the day and the 50-day ATR being 111 pips, the downside target was 1.3060 – (0.0111 – 0.0040) = 1.2989. Statistically there were71 pips left in the trade with a reward to risk of almost 2:1 if you shorted the market at 1.3060 with a stop at the high of the day. How it makes its way to the target is irrelevant as long as the market does not have another reversal in store before the close. Eventually, the market traded down to 1.2965.
Trade zone #3 is between 11:30 – 13:00 and when most people are at lunch. We will stay in a trade during these hours but not initiate
any
new positions as the market tends to chop, run tight stops and show indecision as it waits for traders to get back to their screens.
Chart 1.1 Daily candles to the left of the 30-min chart with the Asian range and European trade zones
FX TRADER MAGAZINE April - June 2013 39
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