Trading the V- Fundamentals Part 2

From "Day Treading the Currency Market" by Kathy Lien

Waiting for the Real Deal

The lack of volume in the FX market has forced day traders to develop different strategies that rely less on the level of demand and more on the micro structure of the market. One of the most common characteristics that day traders try to exploit is the market's 24-hour nature. Although the market is open for trading throughout the day, the extent of market activity during each trading session can vary significantly.

Traditionally, trading tends to be quietest during the Asian session... (blah blah blah... UK is biggest trading center, accounts with rest of Europe for 42% of FX trading, NY account for only 19%...) This makes the London open exceptionally important because it gives the majority of traders(...) an opportunity to take advantage of events or announcements that may have occurred late in the day of the US or in Asian sessions. This becomes even more critical on days when the (FOMC or Fed reserve) meet to discuss and announce monetary policy because the announcement comes at (14:15 EST) which is past the London close.

The Pound trades the most actively against the USD during the European and London trading hours.(...) This provides a GREAT OPPORTUNITY [italics mine] for day traders TO CAPTURE THE INITIAL INTERDAY REAL MOVE THAT GENERALLY OCCURS WITHIN THE FIRST FEW HOURS OF THE ...LONDON SESSION. This strategy exploits the common perception that UK traders are notorious stop-hunters. THIS MEANS THE INITIAL MOVEMENT AT THE LONDON OPEN MAY NOT BE THE REAL ONE! Since the European and London dealers are the primary market-makers for the GBP/USD , they have a tremendous insight into the actual extent of supply and demand for the pair. The trading strategy of "waiting for the real deal" first sets-up when the interbank dealing desks survey their books at the onset of trading and use their client data to trigger close stops on both sides of the market to gain the pip differential. Once the stops are taken out and the books are cleared, the real directional move of the GBP USD will begin to occur, at which point we look for the rules to be met before (... entering a position).This strategy works best following the US open (?) or after a major economic release. With this strategy you are looking to wait for price to settle down and to trade the real market direction afterward.{UNLESS YOU ARE AN ADVANCED TRADER LIKE JD, WHO CAN TRADE IT UP, DOWN, AND SIDEWAYS -ed.}

STRATEGY RULES :

LONG:

1. Early European trading in the GBP/USD begins around 1 AM EST.Look for the pair to make a new range low of at least 25 pips above the opening price (the range is defined as the price action between Frankfurt & London power-hour of 1-2 AM New York time.

2. The pair then reverses and penetrates the high.

3. Place an entry order to buy 10 pips above the high of the range.

4. Place a stop no more than 20 pips away from your entry.

5. If the position moves lower by double the amount that you risked, cover half and trail a stop on the remaining position.

SHORT:

1. GBP/USD opens in Europe and trades more than 25 pips above the high of the Frankfurt & London power-hour.

2. The pair then reverses and penetrates the low.

3. Place an entry order to sell 10 pips below the low of the range.

4. Place a protective stop no more than 20 pips away from your entry.

5. If the position moves lower by double the amount that you risked, cover half and trail a stop on the rest.

(Kathy then proceeds to give illustrated examples but there are many that look quite the same on this thread. I'm sure there's a bookstore nearby if you wish to see her examples. They are on pages 111-113.)

Cheers,

Taters