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Waiting For The Real Deal
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The lark of volume data 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 around-the-clock nature. Although the market is open for trading throughout the course of the day, the extent of market activity during each trading ses­sion can vary significantly.

Traditionally, trading tends to be the quietest during the Asian market hours, as we indicated in Chapter 4. This means that currencies such as the EUR/USD and GBP/USD tend to trade within a very tight range during these hours. According to the Bank for International Settlements' Triennial Central Bank Survey of the FX market published in September 2004, the United Kingdom is the most active trading center, capturing 31 percent of total vol­ume. Adding in Germany , France , and Switzerland , European trading as a whole accounts for 42 percent of total FX trailing. The United States , on the other hand, is second only to the Untied Kingdom for the title of most active trading center, but that amounts to only approximately 19 percent of total turnover. This makes the London open exceptionally important because it gives the majority of traders in the market an opportunity to take advantage of events or announcements that may have occurred during late U.S. trading or in the overnight Asian session. This becomes even more critical on days when the Federal Open Market Committee (FOMC) of the Federal Reserve meets to discuss and announce monetary because the announcement occurs at 2:15 p.m. New York time, which is past the London close.

The British pound trades most actively against the U.S. dollar during the European and London trading hours. There is also active trading during the U.S./European overlap, but besides those time frames, the pair tends to trade relatively lightly because the majority of GBP/USD trading is done through U.K. and European market makers. This provides a great opportunity for day traders to rapture the initial directional intraday real move that generally occurs within the first few hours of trading in the Lon­don session. This strategy exploits the common perception that U.K. traders are notorious stop hunters. This means that the initial movement at the London open may not always be the real one. Since U.K. and Euro­pean dealers are the primary market makers for the GBP/USD, they have tremendous insight into the extent of actual supply and demand for the pair. The trading strategy of wailing for the real deal first sets up when 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 markets to gain the pip differential. Once these stops are taken out and the books are cleared, the real directional move in the GBP/USD will begin to occur, at which point we look for the rules of this strategy to be met before enter­ing into a long or short position. This strategy works best following the U.S. open or after a major economic release. With this strategy you are looking to wait for the noise in the markets to settle down and to trade the real market price action afterward.

Strategy Rules

Long

•  Early European trading in GBP/USD begins around 1:00 a.m. New York time. 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 the Frankfurt and London power hour of 1 a .m. New York time to 2 am . New York time).

•  The pair then reverses and penetrate the high.

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

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

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

Short

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

•  The pair then reverses and penetrates the low.

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

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

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

Examples

Let us go ahead and take a look at some examples of this strategy in ac­tion. Figure 8.11 is a textbook example of the strategy of waiting for the real deal. We see that the GBP/USD breaks upward on the London open, reaching a high of 1.8912 approximately two hours into trading. The cur­rency pair then begins to trend lower ahead of the U.S. market open and we position for the trade by putting an entry order to short 10 pips below the Frankfurt open to the London open range of 1.8804 at 1.8794. Our stop is then placed 20 pips higher at 1.8814 while our take-profit order is placed at 1.8754, which is double the amount risked. Once the take-profit order on the first lot is fulfilled, we move the stop to breakeven at 1.8794 and trail the stop by the two-bar high. The second lot eventually gets stopped out at 1.8740, and we end up earning 40 pips on the first position and 54 pips on the second position.

Figure 8.11 GBP/USD May 2005 Real Deal Example

( Source: eSignal. www.eSignal.com)

Figure 8.12 GBP/USD April 2005 Real Deal Example

( Source: eSignal. www.eSignal.com)

The next example is shown in Figure 8.12. In this example, we also see the GBP/USD break upward on the London open, reaching a high of 1.8977 right at the U.S. open. The currency pair then begins to trend lower during the early U.S. session, breaking the Frankfurt open to the London open range low of 1.8851. Our entry point is 10 pips below that level at 1.8811. Our short position is triggered, and we place our stop 20 pips higher at 1.8861 and the first take-profit level at 1.8801, which is double the amount risked. Once our limit order is triggered, we move the stop to breakeven at 1.8841 and trail the stop by the two-bar high. The second lot gets stopped out at 1.8789, and we end up earning 40 pips on the first posi­tion and 52 pips on the second position.

Figure 8.13 GBP/USD March 2005 Real Deal Example

( Source: eSignal. www.eSignal.com)

The third example is shown in Figure 8.13. In this example, we also see the GBP/USD break upward on the London open, reaching a high of l.9023 right before the U.S. FOMC meeting. The currency pair then breaks lower on the back of the meeting, penetrating the Frankfurt open to the London open range low of 1.8953. Our entry order is already placed 10 pips below that level at 1.8943. Our short position is triggered and we place our stop 20 pips higher at l.8963 and the first take-profit level at 1.8903, which is double the amount risked. Once our limit order is trig­gered, we move the stop to breakeven at 1.8943 and trail the stop by the two-bar high. The second lot gets stopped out at 1.8853, and we end up earning 10 pips on the first position and 90 pips on the second position.

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