Strategy “European Open”

Strategy “European Open”

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Updated: Aug 24, 2022
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Intermediate
7 min read

As you should know by now, the forex market works 24 hours a day. This fact translates not only into the fact that the price moves 24 hours a day, but also into the fact that it is necessary to know the characteristics that have traditionally characterized market movements at certain hours. The knowledge that historically certain currency pairs have been shown to have more consistent movements in a certain time slot can give the trader a better chance that the application of a certain strategy will be successful.

In this article I will describe a well-known trading strategy based on the identification of certain price patterns that take place in a certain time slot with the aim of giving the identified pattern a better chance of success. (In addition to this article, I recommend additional reading of the article on currency correlation to learn how this correlation helps to better control risk exposure and maximize profits).

I. Strategy Description

The strategy that we are going to describe will be for the GBP/USD (British Pound – US Dollar) pair. The strategy will consist of looking for a pattern of price movement around the price registered at the opening of the Frankfurt, that is, we will have as a reference the opening price of the candle formed from 07:00 UTC. We will use 5 minute charts.

  • Once the described reference candle is completed, we must wait for the price to move above (or below) the opening price of the cited candle until it reaches a turning point. This move should be 25 to 40 pips.
  • We now wait for the price to move 25-40 pips or more below (or above, if the first move was below) the opening price of the reference candle until it reaches another turning point. Note that with these two moves we get a defined price range around the opening price of Frankfurt. Keep in mind that moves of less than 25 pips would create a very narrow range and moves of more than 40 pips would result in too wide a range for this strategy.
  • We will wait for the breakout of the upper level of the previously defined range to enter the buy or the breakout of the lower level to enter the sale. Ideally, but not strictly necessary, we should have a pattern of minimum-maximum-break of the minimum or maximum-minimum-break of the maximum (when I say minimum or maximum I mean each part, lower and upper of the defined range area).
  • Stoploss : The stoploss can be placed 40 pips from the entry price. Given the characteristics of the defined movement range, it is a more acceptable stoploss that will leave us free ground for the fluctuations of the market while not being excessive in case the operation does not end as we wish.
  • Exit Strategy : Half of the trade will be closed when 40 pips of profit is reached and the stoploss will be moved to the breakeven level, that is, to the entry price. We can keep the rest of the position open with a trailing stop of 40 points or let it continue until a takeprofit equal to the range defined in the first steps of this strategy.

II. Can I apply this strategy to other pairs?

By proxy you could but keep in mind that the strategy has a logic behind it. There are two parts to this strategy which makes the best pair for it to be GBP/USD. The first is that before the opening of Frankfurt it would be in the so-called “Asian session” during which the GBP/USD is trading at much lower levels than after the opening of Frankfurt (which is followed shortly after by the opening of London ) and at this time many other traders will enter the market for this pair who will make good movements much more likely to take advantage of the fact that historically the GBP/USD pair is a fairly wide movement pair.

III. Understanding the trading strategy

It is a common occurrence for stops to be placed within a short distance of trading levels that determine range areas. When the market opens the direction has not been clearly established and, as I mentioned before, volatility increases so those stops can be easily hit. If the stops on one side of the opening price are hit, the price will go out of the range giving the appearance of a breakout . This move will be exhausted once enough stops have been hit and usually the move will reverse in the opposite direction with the same thing happening again on the other side of the opening price. At this moment almost all the stops around the opening price have been reached and the market will be ready to make the first “real” movement in which stronger positions will participate than those that were in the previous movements only caused by the increase in volatility for the opening of the market. In the described strategy, what is sought is to enter a breakout of the range once this noise has been eliminated and the first directional movement of the morning begins.

These words are very nice but, obviously, it is not so easy. If you try to follow this strategy do not expect to find signals every day. And don’t expect it to always work either: it could open Frankurt and start GBP/USD moving in one direction so we wouldn’t enter or GBP/USD could make several false breakouts from our range area hitting our stoploss and maybe even stay all day inside the range.

Example

In the following image we can see an example of this strategy. The red vertical line marks the 7:00 UTC candle (4:00 on my broker). After the opening of Frankfurt at this time we see how the price first falls until it registers a turning point. From this point the price rises and at a distance of about 24 points from the opening price of Frankfurt it registers a maximum from which it falls again. In this way, the range we were looking for is defined. In this setback, the price falls below the opening price of Frankfurt and from here it rises again, managing to break the upper part of the range area without problems. We enter after the breakout with a stop loss of 40 points, on the orange line 40 points of profit are reached and at this moment we close half of the operation and leave the rest open with a stop loss of 40 pips. The trailing stop moves the stop loss until it is reached at the upper blue line.

Ejemplo de estrategia 'apertura de frankfurt'. efxto.com

The following example shows the formation of an invalid range area around the opening price of Frankfurt that at first glance seems valid but is not because the market only moved about 10 pips around the opening of Frankfurt to define this area. and therefore, according to the given rules, it would not be valid.

Ejemplo de área de rango no válida en la estrategia 'apertura de Frankfurt

It seems very easy, right? Why is it!! But if you follow each and every one of the rules, especially the width of the movement necessary to have a range that is valid, you may be surprised by how few trades you detect as valid.


Sources & references
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James Knight
Editor of Education
James is a lead content editor for Invezz. He's an avid trader and golfer, who spends an inordinate amount of time watching Leicester City and the… read more.

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3. Stop Loss Strategy
4. Pisco Sour Strategy
5. European Open Strategy
a. Strategy “European Open”
8. News Trading Strategy
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11. Countertrend Strategy
12. Martingale
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15. Trendline Strategy

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