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#1 18-09-2020 14:14:40

johnedward
Admin & Trader
From: Paris - France
Registered: 21-12-2009
Posts: 3091
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Forex strategy to trade the European session

Forex strategy to trade the European session


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As day traders rarely have access to information about the volume of transactions in the forex market, they have to develop different strategies which are mainly based on the microstructure of the market rather than on supply and demand. One of the characteristics of the currency markets that day traders try to exploit is its continuous nature. Although the currency markets are open all day, the level of activity during each session usually vary widely.

In general, currency trading tends to be quieter during the Asian session hours. This means that during this time, pairs such as USD/JPY, GBP/USD or EUR/USD tend to move within a relatively narrow price range. The UK is currently the world's most active trading hub, accounting for over 30% of total trading volumes. If we add countries such as Switzerland, France and Germany, the trading of European currencies accounts for over 39% of the total trading volumes. The United States is the second most important forex hub, but it accounts for only 20% of total volumes.

This makes the opening of the UK session extremely important, as it gives most traders the opportunity to profit from events and news that may have occurred during the last US and/or Asian trading sessions. This becomes even more important on days when market relevant economic data is announced, such as the monthly Non-Farm Payroll report (NFP) or major monetary policy meetings such as the US's Federal Open Market Committee (FOMC) whose impact on the market can last for weeks and even months.

Currencies such as the British pound and the euro trade more actively against the USD during the hours when the London and European markets are open. The market is also very active during the brief overlap of the US and European sessions. However, outside of these times the GBP/USD, EUR/USD and the market in general tend to be less active as a high percentage of currency trading is done via UK and European market makers.

This provides a great opportunity for day traders to take advantage of the early intraday moves which typically occur in the early hours of the UK session.

The trading strategy described below exploits the idea that UK traders specialise in "stop hunting", so the initial movement when the UK market opens is not always real, especially in the case of the GBP/USD pair.

As the major London and European traders are the main market makers for the GBP/USD pair, they have an overview of the level of supply and demand for this instrument. This trading strategy begins when the interbank trading desk analyses its order books at the start of the market session and uses its clients' data to perform stop loss execution on both sides of the market, in order to obtain the pip spread (the spread). Once the execution of these orders has taken place, and the books are free of them, the actual directional movement of the GBP/USD begins, and at this point the trader should check if the rules of this technique are being followed before proceeding with a short or a long position.

This strategy produces the best results after the opening of the US session or after the official release of a significant economic report (such as the monthly NFP report). What it does is wait for the "noise" of the market to pass and then entails the opening of a position based on the actual direction of prices.

System rules

At the start of the European session, wait for the GBP/USD to form a minimum range of at least 25 pips from the opening price. In this case, the range is defined as the movement of prices during the busiest period of the London and Frankfurt markets.

Here, the price is supposed to reverse its direction and cross the maximum or minimum price of the range.

If the price breaks the high point of the range, place a buy order to open a position approximately 10 pips above the maximum price of the range. Place a protective stop at a point at most 20 pips below the opening price of the position.

If the price breaks the low point of the range, place a sell order to open a position approximately 10 pips below the minimum price of the range. Place a protective stop at a point no more than 20 pips above the opening price of the position.

If the price moves in your favour by more than double the amount of risk, you should cover half of the position and move the stop loss to the opening price (breakeven point) for the remainder of the position.

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