Tech Strategies for Today's Forex Markets
11/02/2012 7:00 am EST
While the technical strategy that you choose to trade forex will depend heavily upon your personality, there are some general systems that you can use to try and deal with the extreme bouts of volatility that we have seen in the marketplace recently, writes Christopher Lewis, contributor, Forex.com.
With the debt crisis in Europe, many of the currency pairs around the world have simply bounced back and forth between a "risk on, risk off" type of attitude. Because of this, you simply must understand whether or not the markets are in a good or bad mood. It seems somewhat simplistic, but the truth is that risk appetite is everything in the marketplace now, especially since we seem to have very short-term goals these days.
The London Breakout
As the Asian session wraps up, the liquidity starts to dry up in the forex markets. The Asian session is by far the most illiquid marketplace, and as such we begin to see serious trading begin shortly before the London session starts. This is probably the most quiet time of the 24-hour cycle in the currency markets, and as such when the larger trading firms get back into the marketplace we can tell how the attitude of the traders will be for the day.
Essentially, what you are looking for is the beginning of volatility. By keeping track of the highs from the Asian session as well as the lows, you begin to see the "range" of the quiet market. You are essentially waiting to find out what the Europeans are going to do for the day. Once you have a significant break out either above or below the range, this typically will lead you in the right direction for a currency pair during the European trading session.
Granted, this is a 100% accurate but it does give you a heads up when it comes to what the larger chunks of money are going to be doing in the marketplace during the day. Because of this, this gives you a better chance to come out ahead than not. As the money starts to flow back into the marketplace, eventually we begin to see where the larger amounts of money head towards and this of course is where we want to be sending our money to.
One caveat of course is on a night when the Asian markets have been extremely volatile. If that's the case, then this wouldn't be a smart strategy to use as the volatility would be much higher, and therefore have most trading firms on their guard. This doesn't give a "clean" indication of where they want to be, rather how they are reacting. This is two different things if you think about it.
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The Hourly Giant
Another strategy that you can try to use in this choppy trading environment is one that I like to call "The Hourly Giant" system. It's a basic system that essentially looks at the size of the candles on the hourly chart. The idea is fairly straightforward, and just about anybody can use this particular strategy. In fact, this is probably the least "technical" of the strategies that I use, but it is one of the more effective ones.
As usual, I will plot out major support resistance levels. But what's more important in this system is looking for a longer hourly candle that really stands out from the rest. This is because we have had choppy trading so much that a large candle tends to be a bit of an anomaly. In other words, if we get a candle that is twice the height of every other candle over the last 48 hours, you have to pay attention to it and assume that the move meant something. Because of this, you simply go long or short depending on the color of the candle, and leave your stop behind the opposite end.
You are looking for candles that are at least twice the size of the average one during that time period. You aren't necessarily using a strict technical system at this point, but rather using simple observation. You would be surprised how few traders use observation, and simply use what they consider to be magic, which of course is simply a mathematical system.
The Round Number Bounce
If you ever wanted to know how to scalp the daylights out of the forex markets, I will let you in on a secret: If you are willing to trade only occasionally, simply playing for the bounce off of the large round numbers actually works. In other words, if you are coming towards a large round number in a currency pair, you simply buy the pair if you are following towards a large round number, or sell if you are gaining towards a large round number.
An example would be if you were to trade the USD-CAD pair. Let's pretend that the pair is currently trading at 1.0028 during a fairly liquid time of the day. The reason I chose this particular pair is that it has a fairly tight spread. For most of you out there, this pair should be about 3 pips wide as far as the spread is concerned. As we are playing for very small gains, this matters.
The idea is to put in a buy order at the 1.0000 level, thinking that we will bounce when we hit this level. This makes sense, as a lot of large firms base their entries and exits on these large numbers. A lot of traders will take their profits at these levels as well, which means the sellers would be buying at that point in time. This makes the pair bounce, and as such be a smaller trader you can take advantage of this. In this particular trade, you may choose to take profits at 1.0010 or so. It doesn't sound like that big of a deal, but the 7 pips you just made are basically free ones.
Obviously, you are better off using this particular technique when approaching a large round number, and not just some random handle out there. Areas like parity, 1.50, and 1.10 all suggests that a lot of orders will typically be at these places. You obviously cannot try this in an ill liquid pair either, as the spread may be 50 pips.
This is not a system that you would use all of the time, but just a way to simply pack your account a little bit from time to time as you notice these particular opportunities. In a volatile trading environment like we've been in lately, this trick has actually worked quite well lately.
Christopher Lewis, Contributor, Forex.com