Buying New Highs and Selling New Lows

One of the oldest and most powerful money management strategies used to enter into and exit out of trades is using new highs and new lows over a certain period of time.An example would be to sell a new 10-day low to enter into the trade and use a new 10-day high as your trailing protective stop.

This allows one to trade on the daily chart without having to follow the market throughout day. To set your trailing stop, you just have to check the daily chart after the 5PM Eastern close to see what the highest high of the 10 previous days was. If it was different from the previous day’s stop level, you just move your stop, if not, you leave it alone.

You can do this until the market comes back up to stop you out, meaning you are trying to get the most out of the move. The key is to only trade in the direction of the trend as that is where you will find some of the biggest moves.

much as a new 40-day high or low to enter into or exit out of a trade. You can also use this approach on an intraday chart, although I would recommend using higher values.

Perhaps a 20-period high or low on the 4-hour or hourly chart would be more appropriate than a 10-period high or low. You have to check to make sure. But it is easy to backtest this approach as it is easy to identify new highs and lows….either they are or they aren’t. The key to trading on the intraday charts is once again to only trade in the direction of the daily trend.

While this money management approach may not be perfect, it is better than most money management strategies used in the markets and is relatively easy to use. That makes it a valuable tool worth looking into by traders who currently struggle with how to get into and out of a trade

What are the best times to trade for individual currency pairs?

The foreign exchange market operates 24 hours a day and as a result it is impossible for a trader to track every single market movement and make an immediate response at all times. Timing is everything in currency trading. In order to devise an effective and time-efficient investment strategy, it is important to note the amount of market activity around the clock in order to maximize the number of trading opportunities during a trader’s own market hours. Besides liquidity, a currency pair’s trading range is also heavily dependent on geographical location and macroeconomic factors. Knowing what time of day a currency pair has the widest or narrowest trading range will undoubtedly help traders improve their investment utility due to better capital allocation. This chapter outlines the typical trading activity of major currency pairs in different time zones to see when they are the most volatile.

For example : Asian Session (Tokyo): 7 P.m.–4 A.m. EST FX trading in Asia is conducted in major regional financial hubs; during the Asian trading session, Tokyo takes the largest market share, followed by Hong Kong and Singapore. Despite the flagging influence of the Japanese central bank on the FX market, Tokyo remains one of the most important Dealing centers in Asia. It is the first major Asian market to open, and many large participants often use the trade momentum there as the benchmark to gauge market dynamics as well as to devise their trading strategies. Trading in Tokyo can be thin from time to time; but large investment banks and hedge funds are known to try to use the Asian session to run important stop and option barrier levels. Figure 5.1 provides a ranking of the different currency pairs and their ranges during the Asian trading session. For the more risk-tolerant traders, USD/JPY, GBP/CHF, and GBP/JPY are good picks because their broad ranges provide short-term traders with lucrative profit potentials, averaging 90 pips. Foreign investment banks and institutional investors, which hold mostly dollar-dominated assets, generate a significant amount of USD/JPY transactions when they enter the Japanese equity and bond markets. Japan’s central bank, with more than $800 billion of U.S. Treasury securities, also plays an influential role in affecting the supply and demand of USD/JPY through its open market operations. Last but not least, large Japanese exporters are known to use the Tokyo trading hours to repatriate their foreign earnings, heightening the fluctuation of the currency pair. GBP/CHF and GBP/JPY remain highly volatile as central bankers and large players start to scale themselves into positions in anticipation of the opening of the European session.

Know Your Currencies

In the forex markets, it’s worth knowing the characteristics of the currency pairs, since each of them exhibit distinct identities. Most of the currencies exhibit similar movement patterns, which can help a trader confirm price movements. One such close relation can be found between the EUR/USD & USD/CHF.

The price movements of these two currency pairs are absolute mirror images. In short, they have an inverse relationship. If Eur/Usd is rallying, then Usd/Chf should have downward movement, and vice-versa.

The following chart has a comparative price movement of both these currencies, and this inverse relation can be seen very clearly

how does one take advantage of this?

The most obvious fact is that one must not trade both the currencies at the same time. If one is long the Eur/Usd, logically one should not be long the Usd/Chf at the same time, since the Usd/Chf would have a downward movement.

And…neither is it advisable to take opposing trades on these two pairs, because if the trade goes wrong, then the trader would incur losses in both the trades.

Ideally, one should trade either of the two pairs. The best way to take advantage of this fact is to cross-check a trade by looking for confirmation factors on the other pair. If a trader is planning to take a long position in the Eur/Usd, he can look for a similar short setup on the Usd/Chf. If such an opposite setup is present in the Usd/Chf, it only adds further credence to his long Eur/Usd trade.

There are other currency pairs also which exhibit a close relation. Another fact is that each currency has an approximate Average Daily Trading Range (also known as the ADR), which it follows in the normal course of the trading day.

While this is not written in stone, it serves a good thumb rule to estimate the movement of the particular currency. Thus it is worth studying these relationships…to gain a higher edge in the market. Sometimes it is this basic knowledge, which can be the dividing line between success and failure.

Know Yourself, Know Your Setup

Who are you? What are your strengths and what are your weaknesses? Do you thrive amidst chaos or require regimentation and stability? In trading, the answers to these questions are far more important than any setup you can devise.

At its core, trading is a game of psychology, and no amount of reading, no computerized back-testing, no advanced seminar work will produce long-term success if your trading style is in conflict with your basic personality. Contrary to popular belief, successful traders do not change their approaches to adjust to the market but rather find market environments that best suit their inherent strengths.

That’s why in books like Jack D. Schwager’s Market Wizards (New York Institute of Finance, 1989; HarperBusiness, 1993) you will find very successful traders following diametrically opposite approaches to the market and often dispensing what appears to be contradictory advice. In fact, it’s not at all inconceivable to imagine two market wizards taking opposite sides of the same trade yet both walking away with a profit.

To market novices this idea may seem completely illogical. In most businesses we are taught that there is always an optimal way of doing things, that certain processes will be far superior to others. Clearly that’s the case with engineering, where scientific rules of optimization and refinement apply to everything from car production to bridge building. Financial markets, however, are emotional mechanisms, which is why engineering-based solutions to trading inevitably fail.

Financial markets are extraordinarily complex with a multitude of players, each with a different agenda and time perspective, providing the trader with a variety of opportunities for profit. Since the currency market is the largest financial market of all, the flexibility to craft a strategy conducive to your specific personality is even better in FX than in any other market.