EURUSD Day Trades – October 8

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EUR/USD Day Trades – October 8

I am continuing to trade a new forex trading strategy, and was able to get in two trades this morning before switching to another market.

I’ll continue to expand on the strategy and provide more details, in addition to what was shared in the Forex Day Trades – October 7 post.

The strategy works best during the European and/or European and U.S overlap period. Once Europe closes we generally a see bit of a slowdown. As figure 1 shows, volatility is greatest between 6 GMT and 15 GMT. Trades with a strategy such as this should take place inside of these times, as the profit targets are generally pretty small as is, so trading during quiet times means the rewards won’t justify trading.

Between 10 and 15 GMT seems to be the ideal time to trade this strategy.

Figure 1. EUR/USD Hourly Average Volatility

The first trade I took occurred during the European and US overlap period. The trend was up overall (referring to a 5-minute chart), and after creating a new short-term high the price drifted to the side and slightly lower. Such pullbacks provide ideal entry opportunities as risk will generally be quite small.

Figure 2. EUR/USD Trade 1 – 1 Minute Chart

The trade was taken at the lower band, which as indicated in the prior post is just an “envelope” set to 0.01% on a 1-minute chart. The small up arrow marks the entry bar. The initial stop is set at 3.5 pips, but was quickly moved in to 2 pips once the price began to move higher.

The target is based on Fibonacci extensions. Using the prior wave higher to draw our extension, we look to exit at the Fibonacci level closest to the former high (in a downtrend we would look to exit at a Fibonacci level close to the former low). As it turned out, the 61.8% level is right near the former high so an exit is taken and a 3.4 pip profit locked in.

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Since there are so many potential trades utilizing this strategy, there is little need to get greedy and try to make more. Take profits and look for another entry.

This strategy is a “scalping” type strategy. We are trading trends, but for small repeating moves. This means you’ll need a very tight spread to trade the strategy on a 1-minute chart, otherwise you’re better off using a 5 minute chart with a 0.015% envelope to capture bit bigger moves.

Another long opportunity came several minutes later. This one is a bit more complex.

Figure 3. EUR/USD Trade 2 – 1 Minute Chart

Following a strong run-up–some of it was captured on the last trade–there is a sharp pullback which pierces the lower band. Enter long at the lower band with an initial stop at 3.5 pips.

That stop is placed at the time of my entry order. It is a worst case scenario stop and assures I have some sort of loss protection in the market if I lose my internet connection or a scenario like that. Usually this stop will be reduced very quickly, but it is important to place it with your entry order.

Even with a sharper pullback, the price doesn’t move too far past the band. The stop is reduced to 1.9 pips–just below the recent low–once the price begins to move higher again.

The target is based on the prior price wave, which was a big one, so our target is also bigger on this trade utilizing the Fibonacci levels.

As the price moved up toward my target the first time it didn’t hit it, and then pulled back. At this point the stop and target stay where they are. The price then begins to move higher again. Since this creates a new higher low, the stop is moved up to just below this low, locking in at least a 2.3 pip profit. The price continued to consolidate for a bit but then hit the target resulting in a 6.8 pip profit.

This style of trading is highly reliant on the trend. We are keeping risk very small, so if you trade the strategy against the trend, there will be lots of losing trades. For more on how to determine the trend, read Capitalizing on Lower Highs and Higher Lows in Price, as it provides more information on trends.

I also recommend being selective with your trades. There are lots of signals produced, but not all are worth trading. Take only those where the reward is like to outweigh your risk. Also place a stop with your entry order, and reduce the stop level as soon as the price begins to move in your direction. And finally, don’t get greedy with targets. There is lots of opportunity, just take the exit closest to the former price high or low.

For my next post I will attempt more trades on the 5 or even 15 minute chart, as likely many of you will be trading on that time frame.

EUR/USD Day Trades – October 10

Since I don’t usually trade until near the European/US overlap period, before any trades are made each morning I look back to see how the price was acting through the first few hours of the European session. That information helps me decide how I will trade the day. If it is choppy with hard to define trends I likely won’t trade at all. If there is trending movement, I want to be part of it.

Recently I have been working on a day trading strategy involving envelopes, the basics of which were outlined here in Forex Day Trades – October 07, and additional details will be provided in this and future posts.

Know the Trading Environment

This morning the envelopes, which are usually set to 0.01% on the EUR/USD 1-minute chart, were being constantly overrun earlier in the session. The trends were there and tradable, but the bands needed to be expanded a bit. Today I set them to 0.012%. While the increase in envelope width is very small, it equates to about a one to two pip difference. On longs that means I pick up the EURUSD at a slightly lower price, and shorts are taken at a slightly higher price. With the deeper retracements that occurred today, adjusting these was beneficial; if I hadn’t I would have been stopped out on the 1-minute chart trade.

I also did a 5-minute chart trade, but the standard 0.015% envelopes were working fine today.

1-Minute Chart Trade Example

EURUSD 1-Minute Chart

The trend is up and therefore looking pullbacks to the lower band. I had a buy order waiting at the lower band, and was filled on the bar with the arrow below it. A stop of 3.5 pips is always put out with the entry. Once the price began to move higher, the stop was adjusted to just below the recent low–reducing the risk to 3 pips.

Targets are based on Fibonacci extensions. Using our Fibonacci extension tool on the last wave up, it projects our profit targets for the current wave. Under most circumstances it’s either the 61.8% or 100% levels we use. I took profit near the former high at the 61.8% level for 4.5 pips. If you held to the 100% level your profit would have been 8.2 pips.

5-Minute Chart Example

If you trade on the 1-minute your spread needs to be very small, preferably using an ECN trading account. With the 5-minute chart the moves are a bit bigger so you can use a traditional account, but the spread still should be quite small.

EUR/USD 5-Minute Chart

Here was a trade where the trend had been down, followed by a nice rally off the low which makes a higher high. This gives us an indication that the trend may be shifting to the upside again. A buy order is waiting at the lower band with a 5 pip stop. The stop is reduced to 2 pips once the price moves higher.

I prefer taking profits near the former high, so I exited at the 61.8% level for 9.8 pips. Those that would have waited for the 100% level would have gotten 16.6 pips.

There is subjectively involved in this strategy. Being able to see when a trend is occurring and when it may be reversing is crucial. Indicators are not magic. Except for this strategy I rarely use indicators, since they have a tendency to take your eye off the one thing that really matters – price movements. If trading a 1-minute chart, flip back to a 5-minute chart everyone once in a while to see the overall trend. Most of your trades should be occurring in alignment with the trend on the 1-minute and 5-minute chart. Also, between 10 and 15 GMT is the ideal time to trade this strategy (that’s 1300 to 1800 on my charts above).

EUR/USD Day Trades – November 1

Another trending day for the EUR/USD, providing ample opportunity to trade the short-side (puts) during the London session and the start of the US session.

To take advantage of the downtrend, look to enter on pullbacks and exit on the next swing lower. Using 0.01% envelopes provides a context for pullbacks on a 1-minute chart. This technique is addressed in prior day trading posts, including EUR/USD Day Trades – October 8

Just prior this trade, a double top develops and then breaks lower. The break lower signals current momentum is in alignment with the overall downtrend of the day.

Figure 1. EUR/USD 1-Minute Chart

The rectangles on Figure 1 show the entry and exit. The entry is taken near the upper band, with a 3.5 pip stop placed at the time of the trade. This could have been almost immediately reduced to 2 pips (just above the pullback high) as the price began to drop shortly after the entry.

A Fibonacci Expansion tool is used for the exit. The most common exits are 61.8 or 100, but which one is used will depend on how aggressively the price is moving toward the target. Due to the strong selling pressure, the 100 level was used, snagging a profit of 10 pips.

This trade occurred shortly after trade 1, as shown in Figure 2. Shortly after entry it became apparent that the price action was a little choppier than during trade 1. The price had a tendency to consolidate a little more, and therefore at that time was showing less strength than on the first trade.

Figure 2. EUR/USD 1-Minute Chart

This indicated the target would likely have to be at the 61.8 level, instead of the 100 Fibonacci Expansion level.

The entry is taken near the upper band, with a 3.5 pip stop. Once the price dropped, the stop was reduced to the high point just seen, reducing the risk to 2.5 pips. An exit is taken at the 61.8 Fibonacci Expansion level, for a profit of 9 pips.

Two more potential trades are marked with small red arrows in Figure 2. Both would have been profitable.

These trades were taken because they aligned with the overall trend, and on the timeframe being viewed (1-minute chart) the price was continually making lower-lows and lower-highs (See: Capitalizing on Lower Highs and Higher Lows in Price). This is the only time this strategy should be used; it produces a lot of signals which need to be filtered out. The primary filter is that there must be a strong trend in place in to make trades.

A Fibonacci Expansion tool is drawn for each trade, using the most recent price swings. This provides a target, but is somewhat subjective. I may draw my Fibonacci tool connecting to different price levels than you would, which will produce a different target level.

Unless there is a lot of strength, I always opt for a more conservative profit target. Alternatively, you can use a fixed target, such as 6, 7 or 8 pips. Since the maximum stop is 3.5 pips using a 1 minute chart, a 6 to 8 pips fixed target provides a nice reward-to-risk ratio, and the target is still likely to get hit.

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