Opening-range breakout techniques have long been favorites of intraday stock index traders. A similar technique can be used in the currency market to capitalize on price moves in the British pound.
The strategy works best with the British pound/U.S. dollar (GBP/USD) rate, the first few hours after the Frankfurt/London market openings.
Opening-range breakout techniques have long been favorites of intraday stock index traders. A similar technique can be used in the currency market to capitalize on price moves in the British pound.
The "Big Ben" strategy exemplifies this approach. It is this day-trading technique that takes advantage of the shift from trad- ing from one market center to another in background information currency trading.
The Big Ben strategy is a currency-specific trading strategy designed to capture the first direction- an intraday move that often occurs which begins at approximately 1 a.m. ET. Because this currency rate trades lightly outside of London trading hours, the surge in trading every morning in the U.K. gives it a "real" market opening, which the strategy looks to existent during Asian trading hours. When London opens, however, the pound/dollar accounts for nearly one-quarter of Trading Day. The pound/dollar currency pair barely trades during Austral-Asian trading hours (4 p.m. - 3 a.m. ET), leading to a more emotional and chaotic open when European trading desks enter the picture. Currency rates with more continuous, 24-hour trading will have less of a distinct open/close as they pass through the different money centers.
For example, the dollar/yen rate (USD/JPY), which dominates forex activity during Asian trading hours (78 percent of volume), still accounts for 17 percent of trading during European hours.
Before explaining the specific logic behind the methodology, let's take a look at what needs to occur for a trade to set up.
The rules: The following rules are for short trades, but the strategy can be reversed to trade on the long side. Setup: 1. The pair makes a new range low at least 25 pips (a pip is the forex equivalent of a tick, or minimum price fluctuation) below the opening price after the early Frankfurt/London trading in the GBP/USD rate begins around 1 a.m. ET. 2. The pair then reverses and trades 25 pips or more above the opening price. 3. The pair then reverses once again to trade back below the intraday low established in step 1. 4. Sell a breakout (at least seven pips) below the London low. 5. Once filled, place an initial protective stop no more than 40 pips above the entry price. 6. After the market moves lower by the distance between the entry price and the stop, cover half the position and trail a stop on the remainder. These simple rules position you to profit from common behavior that can occur in the pound/dollar when the London/European market opens.
The logic: As mentioned, the pound/dollar rate tends to have lower trading volume outside European/London trading hours because the majority of GBP/USD spot deals are worked through U.K. and European dealers.
The Big Ben currency day-trading strategy allows you to limit initial risk and capture good moves early in the London trading session. The product of years of watching the currency markets, the approach is based on the workings of the global forex market and attempts to exploit its structure.
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