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In today’s episode, you’ll discover forex day trading techniques that work (don’t miss out on this one).
So listen to it in now…
Resources
Intraday Trading Techniques That Work
The Complete Guide to ATR Indicator
Transcript
Hey, hey, what’s up my friend?
In today’s episode, I want to share with you 5 forex day trading techniques that work.
These are some of the stuff that I’ve learned in my early years of trading back when I was a prop trader. I was a short term trader, doing day trading, intraday trading.
I want to share with you a few of the techniques that I use to use when I was a day trader and hopefully, help with your own day trading.
1. ATR exhaustion
ATR stands for the average true range. So you want to know how much a particular market can potentially move in a given day.
To find out, just go down to the daily timeframe, pull out the ATR indicator, you can use a 20-period ATR. This will tell you the average range of let’s say the EUR/USD over the last 20 days.
Let’s say, for example, you pull out the ATR indicator and you realize that the EUR/USD over the last 20 days moves an average of 100 pips. Now how does this apply to us, day traders?
Let’s say you are day trading and the EUR/USD has moved like 150 pips for the day, it’s telling you that it has moved more than its historical volatility, as compared to over the last 20 days.
When that happens, at the back of your mind, you should be preparing to trade the reversal. Well, that’s not to say that the market cannot continue moving higher, yes it can, but the odds of it continuing higher is low because it already has exceeded the daily ATR by 1.5 times.
Instead, what you want to do instead would be to look for trading opportunities to trade the reversal of EUR/USD instead.
This is just one concept called the ATR exhaustion that I want to share with you. So if a market has exceeded its daily ATR by 1.5 times or more, you could consider trading the reversal of that market.
Of course, you don’t want to do that in isolation, you want to take into the context of the market, what is the overall trend of the market? Is there any support resistance nearby, any candlestick patterns to confirm your basis and stuff like that.
2. Know your trading session
The forex trading session can be pretty much broken down into three sessions, the Asia, the London and New York session.
This is important because if you trade let’s say, the major currency pairs like GBP/USD during the Asian session, that pair isn’t really going to move very much because traders in London are not awake to handle the trades in the market.
You have to know your trading session especially know which pairs you’re trading. If you’re trading the major currency pairs, it’s better to be trading during the most volatile session, which is pretty much the London session from open to the close.
And even within the London session itself, there are certain hours which are more volatile than others, for example, the London and New York overlap. Those two hours is when the forex market moves the most.
The reason why you have to know your trading session is very simple. Let’s say you want to trade breakout, when do you think is the best time to trade breakout as on an intraday basis?
Clearly, you want to do it during the most volatile session because this is when the market could potentially move the most. This is when your breakout has the most bang for your buck.
If you trade breakout during the Asian session, you will pretty much fall asleep because the market is unlikely to move very far.
Next…
3. Mean-reverting currency pair
AUD/CAD is a mean-reverting currency pair. What do I mean by mean-reverting? I have done extensive backtesting across different forex pairs because each of them has different behaviour.
I’m just going to show you one of the findings that I’ve found, which is whenever AUD/CAD retests the previous day high, it tends to reverse lower. And whenever it retests the previous day low, it tends to bounce higher.
This is of course not guaranteed always, but we are dealing probabilities. I’ve run a very simple backtest, so let me just explain briefly:
Whenever the price breaks above the previous day high, you go long. And when the price breaks below the previous day low, you exit your long trade and you go short. Then repeat this simple backtest across all the different forex pairs.
This is actually inspired by Andrea Unger who is a World Cup Trading Champion. He shared this technique, and I applied it across all the different forex pairs and I find that the AUD/CAD is a mean-reverting pair.
Whenever this market this pair retests previous high, it tends to reverse lower again. It’s not always, because there are times it breaks out higher and continues trending. But more often than not based on the backtesting, it tends to reverse lower.
How can you use this information? Simple.
If you trade AUD/CAD, and let’s say AUD/CAD is in an overall downtrend and it retested the previous day high and forms a shooting star pattern. To me, that’s a high probability trading setup because you now have stats that are in your favour as well.
4. Trending currency pair
GBP/JPY is a trending currency pair opposite from AUD/CAD. This is a market that tends to trend either higher or lower.
I applied the same backtest to GBP/JPY using that simple trend following system and I discovered that it is a market that tends to trend higher whenever it breaks above the previous day’s high.
How do you use this information? Simple. If GBP/JPY is on an uptrend on the higher timeframe, and the price broke above the previous day high and retests previous resistance turned support, you can look for buying opportunities.
Maybe a bullish hammer has formed, so you’ll look to buy GBP/JPY. Because again, you have the stats on your side to kind of prove that GBP/JPR is a trending market.
And finally…
5. The news release false break
So during the major news release, like non-farm payrolls, I’m sure you can agree that the market goes crazy, spiking up and down. It might seem random, but there’s a pattern based on my observation.
Whenever there’s a major news release, don’t chase the first move because is going to spike up higher or lower. I don’t know which direction but what you have to do is to let the price make that first move.
Let say it spikes up higher, and what you want to see is for the price to take out resistance, you can see this on the 5 or 15-minute timeframe.
You want the price to take out the previous resistance or a previous swing high. When it took out the previous highs or resistance, the next thing you have to look for is a reversal. So you don’t chase the first move, because you’ll wait for the reversal down lower.
When the reversal occurs, it could be a shooting star pattern, it could be a bearish engulfing pattern, that’s when you want to go short.
This is what I call the news release false break, especially for non-farm payrolls. The price tends to take out the previous high and then reverse lower or it could take out the previous low or support and then reverse higher.
You can find this on the 5-minute, the 15-minute timeframe. It can be seen on EUR/USD, GBP/USD. Just look through the charts, and you should see this pattern.
Here’s a quick recap…
Recap
- The ATR exhaustion – if the market has exceeded its daily ATR by 1.5 times or more, it’s likely exhausted and you can look for reversal trading opportunities.
- Know your trading session – for most currency pairs, the London session is when the forex markets move a lot, so you want to focus on trading that session.
- AUD/CAD is a mean-reverting market.
- GBP/JPY is a trending market.
- The news release false break – don’t chase the first move of a news release. Wait for the price to take out the previous highs or lows before you trade in the opposite direction. Because breakout traders will now be trapped and want to cut their losses, which will fuel the market to go further in your direction.
With that said, I wish you good luck and good trading. I will talk to you soon.