Islander and Medici trade the European open

Welcome to Islander's and Medici's European morning trading journal. We have similar trading backgrounds, each with 20+ years trading experience of which the last four years have been in fx.

Additionally, our fx trading focused early on trading around the European opens.

We developed our respective methods for this time period, and since we both trade with similar objectives - to achieve our daily profit target during the morning session - we have decided to combine forces in this thread.

This thread is consequently focused on short-term trading of Euro and Cable between 6am and 10am London time, in the sense that trades are entered and usually also closed within that time frame.

Even for the experienced, trading poses limitless opportunities for learning and development, and the purpose of the thread is the coming together of different perspectives and methods for trading the European morning.

Our objective is the further development and clarification of these perspectives and methods through a collaborative effort, with the expectation of consistent higher returns for all participants.

We hope to post pre-trade analysis, possible entries/exits, as well as analysis, charts and discussion - all with the focus of achieving the objective stated in the previous paragraph.

The thread is intended for experienced traders.

You are more than welcome to participate in the thread with questions and comments, but if you want to post your trades we'd like you to have some kind of method to your trading that is consistently profitable - a method that you document by a post to the thread.

Islander's method can be found in post #5 below.

Medici's method can be found in post #3 below.

Vantage's method can be found here: http://www.forexfactory.com/showpost...&postcount=137

You are welcome to join the journey,

Islander and Medici

Sounds great!

Background on the fx market

The foreign exchange markets as we know them appeared after the breakdown of the Bretton-Woods agreement in the early 1970s when exchange rates started to float freely. Initially it was a market where the largest banks executed orders on behalf of clients and also themselves. Today it's still a market very much controlled by a small number of dealing banks even though that is less apparent than it used to be. In fact, even though you and I view and participate in the market through charts, the majority of transactions are still made over the phone rather than electronically (but the execution platforms are of course electronic).

There have been some major changes in the fx markets since the early days, such as the appearance of ever larger amounts of speculative capital with hegde funds now being responsible for about half of the daily turnover. Another major change is in valuation models and price changes to a much larger extent being tied to equity markets, something which older traders have had to learn to adapt to.

These changes have among other things meant that technical trading profits have diminished over the years. However, there's still a few hours every day when the market works more like in the good old days, and that is the basis for our strategy.

How the market works

The modus operandi of dealers at the major dealing banks is that they have an order book with client orders to execute. Their way of making money is through commission earned on those transaction, and through ways of turning their control of the market into profits through practices such as front-running, stop hunting etc.

The time period we are looking at is the early London morning from about 6am to about 9.30am. This is a time period during the majority of which no major cash equity markets are open, and it is the period of the day when the larger dealing banks in London and mainland Europe go about their business of clearing order books of orders close to the market. And this is the time of the day when markets are most predictable if we can somehow anticipate dealer operations and order flows.

The patterns that develop

The way the morning develops is that dealers push the price to levels where limit orders are placed, and the patterns that develop are that the buying/selling start at some level and keeps on going to higher/lower and higher/lower levels until either a consolidation or a reversal happens. These patterns typically start developing around 6am or 7am, and occur most days, but of course there are ranging or consolidating days every once in a while.

The evidence

Using 3 years of data the strategy of entering cable at 6am and exiting at 7am was tested, assuming that you got the direction right. 90% of the mornings the drawdown was less than 15 pips and the average pip gain at the close of the hour was 17.4 pips.

For a 7am entry and an 8am close, the drawdown was less than 20 pips 90% of the mornings and the average pip gain those mornings was 27.4 pips.

50% of the time, the 7am entry was a continuation trade, i.e. 6am entry was the better trade.

Clearly this is an extremely simple-minded strategy, but to be able to enter a trade a day with a 15/20 pip stop and have a hit rate of more than 90% and a risk-reward ratio of more than 1:1 is one of the most profitable trading opportunities there is. But it hinges on the assumption that we get the direction/trend of the following hour right. This is what we turn to next.

The strategy

The approach for taking advantage of these opportunities is based on four elements:

1. Trend and chart patterns on a longer-term basis, from 1h up to daily charts.

An example of H&S patterns: http://www.forexfactory.com/showpost...&postcount=243

An example of trend continuation trades: http://www.forexfactory.com/showpost...&postcount=244

2. Intra day chart patterns that repeat themselves in the morning.

"The line in the sand" - a frequent pattern: http://www.forexfactory.com/showpost...&postcount=245

Breakout during the Asian session, and then retracement for the European open: http://www.forexfactory.com/showpost...05&postcount=7

3. Identification of support and resistance, Fibonacci and pivot levels for entries and exits.

An example of a continuation trade from a 38.2% Fibonacci level: http://www.forexfactory.com/showpost...&postcount=242

Pivots and Fibonacci levels in conjunction: http://www.forexfactory.com/showpost...&postcount=246

4. Price action at the identified levels.

Typically the analysis follows those four steps, and the final trading decisions are made in the crucial fourth step, answering questions such as, for example: Will the buying begin at the current support level, or will the rate drop 30 pips to the next level before the buying begins? Will there be a breakout or a reversal at the current level? And so on.

So there is a significant discretionary element to the method, even though it is based on objective principles. And the intention is that those principles be further clarified through the development of this thread. It is my experience that it is possible to do better than outlined in the evidence section, and to have 9 out of 10 profitable days with risk-reward ratio significantly better than 1:1. And I'd like to be constantly improving those results.

Hey Medici,

I will be around,but will be silent until i feel i can follow you both

My trading can best be described as “Reactionary Trading” in that I observe the Price Action around pre-determined levels and make my entries based on Price’s reaction to these levels.

Whilst I start my day by reviewing the higher TFs, my main charts are the 15min, 5min and 1 min and I have three monitors, one dedicated to each of them. I watch Cable, Euro and Swissy on each TF.

The Levels that I use are prior Support / Resistance levels, the Psychological Levels – aka Sweet Spots – and the Daily Pivots.

Where appropriate I use Fibonacci to help identify retracements and sometimes potential targets.

In addition, I use the 5 min 30 ema to define the short term trend.
On the 1 min chart this becomes the 150ema and I also add the 30ema on this TF.

These MAs allow easy comparison between currencies and can form the basis of a set of trading rules. The addition of outer levels to make fixed bands can also be used as an alert to Overbought / Oversold Levels.

Pattern analysis – especially Higher Lows / Lower Highs are also an important part of my analysis.

There are many charts in my recent posts that fully illustrate – usually in real time - my use of the above.

Hi FOURX,

happy to see you here. Looking forward to your contributions when you are up for it.

OK Guys I've now changed my initial post in this thread to cover my current methodology and I look forward to seeing familar faces dropping in - even those who trade from a longer perspective....

Hi,

Thanks for this thread, I wish it had started a couple of years ago !

I notice that Islander uses 3 monitors, how many do you find is best Medici ?

Another question, when there are "red" news announcements due, like yesterday, would I be better to move to another pair. GU had 3 biggies, is it safer to trade EU or EJ until the news is passed. I read that Islander monitors CHF as a third pair.

Medici, could you tell me what pairs you monitor please and if/how the forthcoming news announcements effects your trades.

Islander, You say that you usually have a directional bias each morning, I presume you have had more success that way, I guess it gives the mind a rest while waiting for a set up and aids clarity of thought.

Wau, that is alot of information, it might help some newbie here..
thanks

GM, nice to see the thread living and developing. I stick with you

Sold cable at retracement to .236 yesterday's fibo entry 5931.

GM everyone. Bought cable at 5924 for ~20 quick ones.

stopped out. Sold euro at asian low 4300

That's a bit wild...also, remember it's NFP day today.

GM - I see that Asian Session's given us a nice range to trade.....resistance at the 5950 level and support at the MS1 at 5909, although the 925 level has also been in play as Medici has been quick to point out

Edit - this kind of action leads to flat MAs and so they are of no value and its best to look at the PA at the S&R mentioned

GM, I think there may be a (small) break to the upside. Profit-taking end of week, and pre-NFP caution.

Edit...also, there may be sell orders around 5970-6000.

Where that price comes from? support level or sth more? Sold cable at asian high..

Short off 5950 level....the DP is above at 5957

Please say more, why is selling euro at asian low wild, but you buy cable at weaker support than that? I mean 5923..

Thanks - I did hesitate in placing the order, but took it when Euro and Swissy appeared to support a pull back.....TWT