Friday March 5, 2010 - 12:06:20 GMT
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Forex Trading Patterns: Repeat Trades
Forex Trading Patterns: Repeat Trades
When I first started out in forex trading many years ago, an experienced trader took me aside and gave me some advice. The advice was to look for a pattern and repeat the same trading strategy each day until it stops working. He said if you are right 5 days in a row and then lose on the 6th day, you will be way ahead. Once you lose, take a step back and reassess. It seemed easier in those days as all you had to do was come in each day and sell sterling.
I have told this story before so those who have heard it please bear with me. John and I were managing some funds and had turned bullish on the dollar. We built a core USDDEM (‚Äúdollar-mark‚ÄĚ) position at 1.70 and set a strategy to buy USDCHF a dip each day until it stopped working. Well, it was one of those rare straight line trends that we got in sync with and after about one month sold the USDDEM out at 1.95 while collecting profits each day with our buy USDCHF on dips strategy. The result was about a 100% return to our investors during that one month period.
The aim in relating this story is to not to brag but to illustrate a way of trading where you don‚Äôt try to recreate the wheel each day or look to trade both sides of the market. The objective is to find a pattern that works and keep repeating a trading strategy it until it stops working. The day it stops working or the pattern changes, step back, reassess and search out a new pattern to trade. The earlier you recognize a pattern, the more opportunities you have for a repeat trade. There are also patterns that do not call for repeat trades each day but for repeat trades whenever the pattern appears.
There are some patterns that are quantifiable while others tend to be subjective. The easiest way to explain this is by giving some examples:
- One of my favorite patterns is when a currency pair trades on both sides of a pivotal big figure (round number). As noted in my last article, Importance of Big Figures in Forex Trading, a pivotal big figure is one that ends with the number 0, 2,5, 8 (e.g. EURUSD 1.32, 1.35, 1.38. 1.40). A hypothetical example would be EURUSD trading around 1.40. In this case, 1.40 prints each day with support and resistance emerging on both sides of it. The longer the pattern goes on, the tighter the range tends to get, the more momentum is drained and the greater risk of a directional move taking place once the pattern is broken. In the meantime, there are opportunities for repeat trades with limited risk by buying below or above this pivotal level although my preference is usually to trade on one side of the market. In this case, profits can be taken at the pivotal level or above it if buying dips or below it if selling rallies until the pattern is broken.
- I look for a technical indicator that seems to be tracking a move closest and try to trade on the strong side of the market using this indicator until it stops working, For example, often you see a pattern where a currency pair bounces off an indicator, such as a 200 hour moving average (allowing some leeway for brief breaks above or below it as this is not an exact science). In these times, selling or buying against this indicator when it is approached or tested until it stops working is an example of a repeat trade.
- See the USDDEM example above for trading in a strong trend.
- One observation I made during the current EURUSD downtrend is that it tested sub-1.35 on several occasions, including making new lows, but did not close below this level. In this case, a repeat ‚Äúcontra‚ÄĚ trade would be to buy sub-1.35 once you sense a low has been made and hold for a move back above 1.35. Only a close below 1.35 would break this pattern.
- An example using a closing pattern was made in a post by a member of the GVI Forex professional forum (see below) and one that could be used for a repeat trade unless USDJPY closes below 88. The low trade on March 4 was 88.15 followed by a sharp move above 89.
- Brisbane Flip 14:26 GMT March 4, 2010
Maybe a few see 88 as some kind of line in the sand or tolerance level for Japan. We have only closed on weekly basis once below 88 in the past fifteen years (Nov 09) and this was followed by a quick 10 big fig short squeeze.
- Another example of a closing pattern is in the current EURUSD downtrend. Despite a soggy tone and some sharp moves, weekly closes during February 2010 were within a tight range. The range for Friday closes was 1.3590-1.3613 for the last three weeks of February (and 1.3590-1.3652 for Friday closes for the entire month) despite a bearish market and new lows being made for the trend during this period. This offered opportunities for repeat end of week trades during February although it took a brave soul to trade this pattern. As of this writing on Friday March 5, the EURUSD is trading at 1.3585-90 after a 300 pip (1.3535-1.3736) range during the week.
I have only scratched the surface of this topic but as can be seen from the above examples, there are patterns that one can look for, such as those around pivotal levels, and others where you have to search them out. The point is once you recognize a pattern you have something you can use for a repeat trade until it stops working. When the pattern is broken and it stops working, this also gives you a clue as to market direction and risk.
Jay Meisler has been trading the forex market for more than 30 years, as an interbank dealer, fund manager and independent trader. He is a co-founder of Global-View.com the leading forex discussion site and home of the original forex forum. Global-View is a place where traders come for forex trading ideas, latest rumors, flows and breaking news.
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