Chapter 11
Technical Trading Strategy: Waiting for the Deal

The lack 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 round-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 EURUSD and GBPUSD tend to trade within a very tight range during these hours. According to the Bank of International Settlement's Triennial FX Survey published in September of 2014, the United Kingdom is the most active trading center, capturing 41% of total volume. Adding in Germany, France, Italy, and Switzerland, European trading as a whole accounts for 50% of total FX trading. The United States, on the other hand, is only second to the United Kingdom for the title of most active trading center, but that amounts to only approximately 19% 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 overnight Asian sessions. This becomes even more critical on days when the FOMC meets to discuss and announce monetary policy because the announcement occurs at 2:15pm NY Time, after 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 outside those time frames, the pair tends to trade relatively lightly because the majority of GBPUSD trading is done through UK and European market makers. This provides a great opportunity for day traders to capture the initial directional intraday real move that occurs within the first few hours of London trading. This strategy exploits the common perception that UK traders are notorious stop hunters. This means that the initial movement at the London open may not always be the real one. Since UK and European dealers are the primary market makers for the GBPUSD, they have tremendous insight into the extent of actual supply and demand for the pair. The “waiting for the real deal” trading strategy 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 GBPUSD 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 for the noise in the markets to settle before trading the real trend of the day.

Strategy Rules

Longs:

Early European trading in GBPUSD begins around 1am NY Time, and we look for the pair to make 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 6 GMT to 7 GMT NY Time).
Look for the pair to reverse 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 25 pips away from your range high, or 35 pips.
If the position moves lower by 50 pips, close half of the position, move stop on rest to breakeven, and target three times risk, or 105 pips on the remainder.

Shorts:

GBPUSD opens in Europe and trades more than 25 pips above the high established during the Frankfurt to London power hour.
Wait for the pair to reverse and penetrate the low.
When that occurs, place an entry order to sell 10 pips below the low of the range.
Place a protective stop no more than 25 pips away from your range low, or 35 pips.
If the position moves lower by 50 pips, close half of the position, move stop on rest to breakeven, and target three times risk, or 105 pips on the remainder.

Examples

Now let's take a look at some examples of this strategy in action. Figure 11.1 is a textbook example of the “waiting for the real deal” strategy. Between 6 and 7 GMT, the range high and low for GBPUSD are 1.5359 and 1.5234, respectively. At the start of the London trading session, we see GBPUSD squeeze upwards, taking out the range high of 1.5359. At the time, we place an order to sell GBPUSD 10 pips below the range low at 1.5324. The entry is triggered about an hour and a half later. The protective stop is placed 25 pips above the range low (35 pips total) at 1.5359. A take profit on half of the position is placed at 1.5274, or 50 pips below the entry price. The stop on the remainder of the position is moved to breakeven or 1.5324. The second half of the position is exited at three times risk at 1.5219 shortly after the NY open.

Image described by surrounding text. — **Figure 11.1** GBPUSD 5-Minute Chart

*Source*: eSignal

The next example is shown in Figure 11.2. In this example, the range high and low established between 6 and 7 GMT are 1.5433 and 1.5399, respectively. At the start of the London trading session, we see GBPUSD squeeze upward, taking out the range high of 1.5433 and racing all the way to 1.5492. At the time, we place an order to sell GBPUSD 10 pips below the range low at 1.5389. The entry is triggered around the NY open. The protective stop is placed 25 pips above the range low (35 pips total) at 1.5424. A take profit on half of the position is placed at 1.5339, or 50 pips below the entry price. The stop on the remainder of the position is moved to breakeven or 1.5389. The second half of the position is exited at three times risk at 1.5284 after the London open on the following trading day.

The third example is shown in Figure 11.3. In this example, the range during the Frankfurt London power hour is 1.5187 and 1.5139. At the start of the London trading session, GBPUSD drips lower, breaking below the range low and trading down to 1.5105. When the range low is broken, we place an order to buy GBPUSD 10 pips below the range high at 1.5197. The entry is triggered around the NY open. The protective stop is placed 25 pips below the range high (35 pips total) at 1.5172. A take profit on half of the position is placed at 1.5247, or 50 pips below the entry price. The stop on the remainder of the position is moved to breakeven or 1.5197. The second exit is not shown in the chart in Figure 11.3, but the breakeven stop is triggered.