Since I don’t usually trade until near the European/US overlap period, before any trades are made each morning I look back to see how the price was acting through the first few hours of the European session. That information helps me decide how I will trade the day. If it is choppy with hard to define trends I likely won’t trade at all. If there is trending movement, I want to be part of it.
Recently I have been working on a day trading strategy involving envelopes, the basics of which were outlined here in Forex Day Trades – October 07, and additional details will be provided in this and future posts.
Know the Trading Environment
This morning the envelopes, which are usually set to 0.01% on the EUR/USD 1-minute chart, were being constantly overrun earlier in the session. The trends were there and tradable, but the bands needed to be expanded a bit. Today I set them to 0.012%. While the increase in envelope width is very small, it equates to about a one to two pip difference. On longs that means I pick up the EURUSD at a slightly lower price, and shorts are taken at a slightly higher price. With the deeper retracements that occurred today, adjusting these was beneficial; if I hadn’t I would have been stopped out on the 1-minute chart trade.
I also did a 5-minute chart trade, but the standard 0.015% envelopes were working fine today.
1-Minute Chart Trade Example
EURUSD 1-Minute Chart
The trend is up and therefore looking pullbacks to the lower band. I had a buy order waiting at the lower band, and was filled on the bar with the arrow below it. A stop of 3.5 pips is always put out with the entry. Once the price began to move higher, the stop was adjusted to just below the recent low–reducing the risk to 3 pips.
Targets are based on Fibonacci extensions. Using our Fibonacci extension tool on the last wave up, it projects our profit targets for the current wave. Under most circumstances it’s either the 61.8% or 100% levels we use. I took profit near the former high at the 61.8% level for 4.5 pips. If you held to the 100% level your profit would have been 8.2 pips.
5-Minute Chart Example
If you trade on the 1-minute your spread needs to be very small, preferably using an ECN trading account. With the 5-minute chart the moves are a bit bigger so you can use a traditional account, but the spread still should be quite small.
EUR/USD 5-Minute Chart
Here was a trade where the trend had been down, followed by a nice rally off the low which makes a higher high. This gives us an indication that the trend may be shifting to the upside again. A buy order is waiting at the lower band with a 5 pip stop. The stop is reduced to 2 pips once the price moves higher.
I prefer taking profits near the former high, so I exited at the 61.8% level for 9.8 pips. Those that would have waited for the 100% level would have gotten 16.6 pips.
There is subjectively involved in this strategy. Being able to see when a trend is occurring and when it may be reversing is crucial. Indicators are not magic. Except for this strategy I rarely use indicators, since they have a tendency to take your eye off the one thing that really matters – price movements. If trading a 1-minute chart, flip back to a 5-minute chart everyone once in a while to see the overall trend. Most of your trades should be occurring in alignment with the trend on the 1-minute and 5-minute chart. Also, between 10 and 15 GMT is the ideal time to trade this strategy (that’s 1300 to 1800 on my charts above).