The forex market operates around the clock, thus not only does one need to be concerned with price movements, but they also need to know the importance of the time at which they are trading. By utilizing certain trading strategies at certain times, traders have a better chance of realizing profits. Different currency pairs are prone to somewhat more consistent movements at differing times of the day.

TUTORIAL: The Forex Market

The following day trading strategy takes advantage of price change patterns but couples the pattern with a time frame that makes the pattern more reliable than if traded at a random time. (Knowing the relationships between pairs can help control risk exposure and maximize profits. See Using Currency Correlations To Your Advantage.)

The Strategy
The following strategy is for the GBP/USD currency pair. We are looking for movement on both sides of the Frankfurt opening price. Trading begins in Frankfurt around 7am GMT. This is the bar we will use for our opening price.

The strategy is as follows

  1. A 25 to 40-pip move or more above (or below) the opening price at 7am GMT.
  2. Then a 25 to 40-pip move or more below (or above) the opening price.
  3. This creates a range of movement on both sides of the opening price. We enter a trade when either the high or low of this range is broken. Ideally, we want to see low, high, low breakout, or high, low, high breakout, although this does not need to be the case.
  4. Initial stop is 40 pips.
  5. Take profits on half of the position when showing a 40-pip profit. Trail the rest of the position with a 40-pip trailing stop, or alternatively create a second profit target. This can be done by calculating the difference between the morning high and morning low. Then add that difference to the breakout point, this is the profit target (covered in example below).
  6. Avoid patterns where initial moves in each direction are larger than 40 pips. Moves such as this create large opening ranges that are tradable themselves.

Because we are going to wait for at least a 25-pip movement above and below the open price, it is common to wait an hour or more for a tradable breakout. Until the breakout occurs, we do not enter into a trade using this strategy.

Why the GBP/USD Pair?
The GBP/USD exchange rate is often referred to as the "Cable." The cable is not heavily traded before the Frankfurt open. This is because the only market open right before Frankfurt and London is the Tokyo market. The cable is lightly traded on the Tokyo exchange and because of this, there is more volatility when traders enter the market around the Frankfurt opening time, which is followed shortly by the London open. Some other currency pairs are more evenly traded throughout the day and thus this strategy is not as effective.

Also, the GBP/USD is a volatile currency pair. It has large swinging moves that create excellent profit opportunities. Where there are large swings and profit potential, there is also the probability of being stopped out. We wait for the market to move both directions before entering a trade so we can reduce the likelihood of being stopped out of our trade. After these initial price movements have taken place, the next move – our breakout - is more likely to have conviction behind it because all the weak positions were shaken out of the market in initial rate swings. (To learn more about other strategies, refer to Confirm Forex Momentum With Heikin Ashi.)

Logic Behind the Strategy
Traders often put stops just outside ranges. When the market opens, and a direction has not been definitively established, these tight stops are triggered by the increased volatility of the open. Stops on one side of the opening price are triggered, pushing rates out of the range and giving the illusion of a breakout. Once all the stops and weak positions (traders not completely dedicated to this first move after the open) have been cleared out, the initial move slows and often reverses. The same thing happens on the other side of the opening price. All tight stops around the open price have been triggered and now the market is ready to make its first real move. This move is more likely to have strong traders and positions behind it and be based on more solid fundamental and technical criteria than the initial weak moves triggered simply by increased volatility.

We enter a trade after this noise and stop triggering has subsided and the market is making its first strong move and triggering a breakout of the either the high or low of the range established after 7am GMT. The morning session does not always play out in this fashion; patience is required in finding the pattern.

Example
The example in Figure 1 shows how the strategy works. The blue vertical line is when trading begins at 7am GMT. The two blue horizontal lines mark the high (32 pips above open) and low (33 pips below open) made after our open of 1.4862. The market moves down, setting the low, then rallies to set the high and then breaks below the low again. We enter one pip below the old low at 1.4828 (first circle). A stop of 40 pips is set. When the market moves down 40 pips (or the equivalent of our stop), we close out half the position and change our stop order to a trailing stop of 40 pips.

At 1.4788, we lock in our 40-pip profit (second circle). The remainder of the position has a 40-pip trailing stop. The market in this example continued to move down to 1.4758. At this point it began to rebound and the remainder of our position was exited at 1.4798 (third circle) for a 30-pip profit. Sometimes the market will run and we will make more on the second half of the position, other times it will stall and reverse resulting in a smaller gain than on the first half the position.

Alternatively, we can use a second profit target by calculating the height of the opening range and then adding/subtracting it from the breakout point. In this example, the opening range is 65 pips. Therefore, we subtract 65 pips from our breakout point at 1.4828, giving us a target of 1.4763 which was also hit in this example (not marked on chart).

fx trading strategy
Figure 1: GBP/USD, Feb 10, 2009. 5 Minute Chart. All times in GMT.
Source: Forexyard

Figure 2 looks at an alternative setup. The market moves lower, then higher, pulls back slightly, then continues higher, breaking above the opening range at 1.5842 and continuing over 120 pips higher. The open, low and high of the morning range are marked by horizontal lines. (Learn this simple momentum strategy and its profit protecting exit rules. Check out The 5-Minute Forex "Momo" Trade.)

fx trading strategy
Figure 2: GBP/USD, Oct 28, 2010. 15 Minute Chart. All times in GMT.
Source: Forexyard

Strategy Criticisms
As with any strategy, there is a potential downside. It is possible that the market will continue to range, resulting in several false breakouts and, as a result, losses. In other words, the market may make multiple new swing highs or lows then quickly reverse before finally making a large move. It is also quite possible our entry criteria will not be met and thus we miss out on a large move because the market starts moving in one direction and continues in that direction. For this reason, we will not get trade signals everyday from this strategy.

The Bottom Line
This strategy takes advantage of increased volatility in the GBP/USD pair near the beginning of the Frankfurt, and then London, sessions. Trades are made after a swing high, then a swing low is made, both 25 to 40 pips from the open, and our trade is entered when a new high is reached (or swing low, then high and a break lower). The strategy does have a few downsides, but it can also be profitable, and it controls risk. The strategy is easy to implement and takes advantage of patterns seen around the open of a market. (Trading forex can make for a confusing time organizing your taxes. But there are simple steps to keep everything straight. To learn more, read Forex Taxation Basics.)

Related Articles
  1. Charts & Patterns

    How To Use Volume To Improve Your Trading

    The basic guidelines to analyzing volume may not apply in all situations, but overall, they can help direct entry and exit decisions.
  2. Mutual Funds & ETFs

    The ABCs of Mutual Fund Classes

    There are three main mutual fund classes, and each charges fees in a different way.
  3. Investing Basics

    5 Common Mistakes Young Investors Make

    Missteps are common whenever you’re learning something new. But in investing, missteps can have serious financial consequences.
  4. Trading Strategies

    4 Common Active Trading Strategies

    Active trading entails buying and selling securities with the intent of profiting from short-term price movements.
  5. Mutual Funds & ETFs

    The 4 Best American Funds for Growth Investors in 2016

    Discover four excellent growth funds from American Funds, one of the country's premier mutual fund families with a history of consistent returns.
  6. Products and Investments

    A Guide to DIY Portfolio Management

    These are some of the pillars needed to build a DIY portfolio.
  7. Stock Analysis

    6 Risks International Stocks Face in 2016

    Learn about risk factors that can influence your investment in foreign stocks and funds, and what regions are more at-risk than others.
  8. Investing

    What Investors Need to Know About Returns in 2016

    Last year wasn’t a great one for investors seeking solid returns, so here are three things we believe all investors need to know about returns in 2016.
  9. Investing

    3 Things About International Investing and Currency

    As world monetary policy continues to diverge rocking bottom on interest rates while the Fed raises them, expect currencies to continue their bumpy ride.
  10. Investing News

    Tufts Economists: TPP Will Reduce U.S. GDP

    According to economists at Tufts University, the TPP agreement will destroy half a million jobs in the U.S. by 2025.
RELATED FAQS
  1. What is arbitrage?

    Arbitrage is basically buying in one market and simultaneously selling in another, profiting from a temporary difference. ... Read Full Answer >>
  2. What is Fibonacci retracement, and where do the ratios that are used come from?

    Fibonacci retracement is a very popular tool among technical traders and is based on the key numbers identified by mathematician ... Read Full Answer >>
  3. How do mutual funds work in India?

    Mutual funds in India work in much the same way as mutual funds in the United States. Like their American counterparts, Indian ... Read Full Answer >>
  4. Does mutual fund manager tenure matter?

    Mutual fund investors have numerous items to consider when selecting a fund, including investment style, sector focus, operating ... Read Full Answer >>
  5. Why do financial advisors dislike target-date funds?

    Financial advisors dislike target-date funds because these funds tend to charge high fees and have limited histories. It ... Read Full Answer >>
  6. What licenses does a hedge fund manager need to have?

    A hedge fund manager does not necessarily need any specific license to operate a fund, but depending on the type of investments ... Read Full Answer >>
Hot Definitions
  1. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
  2. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
  3. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
  4. Discouraged Worker

    A person who is eligible for employment and is able to work, but is currently unemployed and has not attempted to find employment ...
  5. Ponzimonium

    After Bernard Madoff's $65 billion Ponzi scheme was revealed, many new (smaller-scale) Ponzi schemers became exposed. Ponzimonium ...
  6. Quarterly Earnings Report

    A quarterly filing made by public companies to report their performance. Included in earnings reports are items such as net ...
Trading Center