There is a lot of ways to trade Forex market. Some people are attracted to participate in it because of its long lasting primary trends. Others like large leverage available. Others still might like 24 hour nature of this markets, while yet another another group might appreciate the unprecedented volume. There is little surprise, that for a large segment of traders, active intraday trading is a way to go.
Very short term traders tend to concentrate on price action trading methodologies, rather than indicator and oscillator based systems. An example is trying to exploit previous highs or lows. Congestion zones are other areas of interest. So are simple chart patterns, like triangles, pennants and wedges. Even something a little more complex, head and shoulders with its variations known as "crowns" are price action set ups. They don't require any other input but the price data itself.
Past high and lows are viewed as supports and resistances. When trading intraday, it is impossible to look for bounces off of every one of those levels and expect to be profitable. The key to successful intraday trading requires that we be more selective and enter only at those levels where a reaction is more likely. For example, one could look for areas where there is a confluence of these trading zones. A high, or low, visible on both 15M and 5M charts is certainly more important that one apparent only on 5M graph.
Then there are psychologically important levels. These areas might not have a clear representation as most recent support or resistance zones, but have importance because of other reasons. Probably best known of these are round numbers, also known as "the figures". Example of round number is 1.5600 in EUR-USD, or 107.00 in USD-JPY. Fractional even numbers like 1.5640 or 107.70 are too common and not really of much importance. On the other hand "full" or "triple zeros", like 1.5000 in EUR-USD, are extremely important but don't happen often enough and, for the purpose of this article, are treated as any other round number.
Why are those areas psychologically important levels? Market participants as a whole tend to put conditional orders near or around the same levels. While stop-loss orders are usually placed just beyond the round numbers, traders will group their take-profit order at the round number. As a result, take-profit orders have a very high tendency of being placed at full "figure" level. Since the FX market is a nonstop continuous market, speculators also use stop and limit orders much more frequently than in other markets. Unlike other financial markets, an average trader doesn't have access to the order book and can judge for himself the order flow. Round offer a relative predictability of order placement.
It is believed that large banks with access to conditional order flow, like stops and limits, actively seek to exploit these zones. So, strategy of fading round numbers attempts to put traders on the same side as market makers or the "smart money". Here are rules for a simple, contra-trend, trading strategy.
For a buy set up, identify a currency pair that has already moved 30-50 pips and is approaching round number. Once the figure is breached, enter a position a few pips below the level, but no more than 10-12 pips away. Place stop/loss 15-25 pips from your entry. Look to take profit at minimum twice the amount you risked. For a sell trade, revers the rules.
Strategy is very simple, but should be practiced for a while, just like any other one. Also, some currency pairs with large spread, are not necessarily best candidates for using it. GBP-JPY comes to mind. On the other hand, most of the major crosses lend themselves handsomely for this set up. They have small spreads and, collectively, touch round numbers often enough throughout the day, to make it a viable trading method.
| Mike P. Kulej is a Chief Forex Strategist for Spectrum Forex LLC. He specializes in mechanical trading systems as explained on http://www.spectrumforex.com - Spectrum Forex LLC offers numerous services to individual traders. With questions and comments e-mail him at kulej@spectrumforex.com |
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