Ok, this might not be for everyone, especially those in the US, because it’s in the middle of the night or very early in their morning … but, it’s a great trade for us here in the land of Oz, or of course those in Europe. It’s also not for the feint of heart or those committed to swing or position trading … it’s a trade that needs to be watched like a hawk – perfect for the day traders.
At the start of the London session (or often, an hour or two earlier when Germany / France come in), there’s often a hefty push in one direction – breaking through the high or low of the previous session quite convincingly. To the beginner, they think “hey, this is really moving, I’m getting onto this one!”, and they go long if the price is breaking to the high side, or they sell if the price is breaking on the low side. But, the opposite happens, and price makes a hasty retreat in the opposite direction, often moving back to the point at which it started an hour or so before.
Why does this happen? Well, I believe it’s the movers and shakers of the forex market (the bigger institutions) faking a big move, to suck in all the little guys who don’t know any better. Now, for all you traders who have read all the “why forex is so great” blogs / e-books etc. stating how the market is so liquid and can’t possibly be moved by any particular player – I have news for you! But, I’ll leave that for another blog entry in the next few days.
This type of trade doesn’t happen all the time, but it happens often enough to make money from it. The idea is to wait for a break-out (20 to 30 pips above or below the high/low of the previous session), then get ready for price to reverse. I got in a little late today (see chart above), but I still made an easy 20 pips or so. You can set your stop quite tight and your target to near the break-out level for the best success.
Try it, backtest it, I think you’ll find it works pretty well on the GBP/USD or the EUR/USD (a little less volatile than the pound).
Good luck and trade seriously!