Posted on: 15 Jan, 2020
Have you ever asked yourself, hmmm, this price pattern looks familiar to me... or, why is is that my trend trading strategy struggles when I put on a trade midday in the US session? Plain and simple, because there are common traits in how price moves in the Forex market.
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If you’ve been around the block trading forex for long enough, you may have probably noticed some of these forex patterns playing out. Didn’t you? But are you able to capitalize on it?
If that’s the case, the recognition of this repetitive intraday price dynamics definitely represents an opportunity to expand the collection of ‘aha’ moments in your journey as a trader, and along the way, be better prepared to collect pips out of the marketplace.
But for these patterns to stick and turn them into practical observations for your own trading, there is no substitute for putting in the hard work, studying them and engage in repetition.
While I have no control over how much time you will dedicate to exploit these behaviours, fortunately for you, in this article I will do my best to conceptualize these patterns and along the way, hopefully, you can feel as though I’ve contributed to shorten your learning curve.
In this article, therefore, I’d like to provide a frame of reference from which you can learn typical price dynamics in European currencies based on when and how these movements occur. The mastery of this concept can help you to refine the timing of your entries and define the bias.
For the sake of keeping this exercise as relevant as possible I will center on a currency heavily traded in the European/London session as is the Pound. These intraday patterns in the GBP, which also apply to the Euro for this matter, are composed of the following phases and nuances.
Phase 1: The Asian range
Phase 2: The Asian range breakout
Phase 3: The unfolding flows
Types of flows:
3.1 Clean breakout of the Asian range
3.2 Clean reversal of the Asian range
3.3 Real trend confirmation
3.4 Double breaker
3.5 Extended double breaker
3.6 Clean breakout w/ midpoint rejection
3.7 Re-engagement w/ the real trend
3.8 Real trend failure
3.9 Extended Asian range
3.10 Asian range not broken
3.11 Fundamentals impact dynamics
3.12 Context traded
3.13 London market close
3.14 Account for the Daily ATR
3.15 Definition of targets for the day
The first period will be labeled as the Asian range (phase 1). The first peculiar characteristic of this phase is that the market is confined in a relatively tight range when compared to the rest of the sessions. Trading activity is very low as reflected by the sub-par tick volume generated.
During this period of the Asian range, the price is likely to fade out breakouts, in other words, is much harder for trends to be long lasting during this time of the day. The Asian range will be defined by the high and the low in this particular time. See the Asian range outlined below:
The second period is what’s dubbed the Asian range breakout (phase 2). In the next few hours after the Asian range is formed, most likely during the high volatile open of markets in Frankfurt or London, which happens to be 2 or 3 hours after the end of the Asian range, a breakout occurs.
At times, this breakout or resolution of the Asian range, as it’s the case in the example below, can take place immediately after the formation of the Asian range, even if this is quite seldom.
Whenever the Asian range is broken, several scenarios can unfold, which is what’s going to be part of the third period or phase, named the unfolding flows (phase 3).
The first scenario is the most straightforward and it includes that the price trajectory continues in the direction of the Asian range breakout with the opposite end of the range never threatened to be tested again. I call this a clean breakout of the Asian range (3.1).
The illustration below is a continuation of the Asian range breakout. The moment the market finds acceptance beyond the 100% proj target from the Asian range, it validates the trend.
However, as experienced traders know, the market would perform, more often than not, all types of tricks in order to grab sufficient liquidity before the real trend unfolds.
Therefore, a second scenario to account for is the reversal of the Asian range breakout. The scenario playing out below would fall under this category. I’d call this pattern a clean reversal of the Asian range (3.2). If you wonder why ‘clean’, well, because after the initial head-fake, that’s precisely the movement that acts as a precursor of the real trend developing.
I’d like to pause for a second and open up some brackets to clarify an important concept. When is it that we get a real trend confirmation (3.3)? Either bullish or bearish. As a rule of thumb, whenever the market accepts by closing beyond the 100% projection, that’s the trigger we need to validate the real trend.
To calculate the 100% proj target, we must draw a Fibonacci retracement from the high to the low of the Asian range. From there, we will mark the 100% proj targets in the chart. See below:
Another pattern of the third phase to be on the lookout for to deciphering the unfolding of the flows is one that tends to be quite deceiving even if not that unusual.
This one goes I’ve coined it double breaker (3.4), and it consists of price breaking out both edges of the Asian range before the real trend unfolds.
The logic for the market to resort to this double swing, from a liquidity perspective, is quite obvious. The market initially induces the trigger of buy stops, only to stop these accounts out by cleaning out whatever sell stops were placed on the opposite side of the Asian range.
Once these stops are cleared, the market no longer has a reason to auction any lower, and it’s off to the races towards the direction the market initially broke through the Asian range.
Below is the example of another double breaker, even if this one, due to the nature of the price extensions beyond the Asian range, is definitely quite nerve-wracking.
I’d personally call this one an extended double breaker (3.5) as price travels in both directions, especially on the second breakout of the Asian range, for a significant extension.
Here is a hot tip for what at times can unfold into a monster trade. As part of the clean breakout of the Asian range, if the first poking of price beyond the Asian range is followed by a retracement that sees a rejection at the midpoint of the Asian range, watch out!
You could be in front of a huge opportunity to accumulate handsome profits that will far exceed the stop loss size required to find out if this trade will work out in your favor.
In the example below, I illustrate this trade, which I call clean breakout w/ midpoint rejection (3.6). Also notice how the run struggles at the 100% proj before the real trend is validated, which is synonymous that the trend is ‘off to the races’.
Another ideal scenario to exploit when trading the GBP before the London close is to wait for the real trend to be confirmed ahead of the NY open, in line with the dominant flows. Whenever that’s the case, the likelihood of price following the same direction is significantly higher. I’d call this type of dynamics ‘re-engagement with the real trend’ (3.7). If you are looking for strategies to trade the forex market, I have you covered, just check the link.
The example that I provided above is also ideal in terms of where the opportunity to engage in sell-side action presents itself. If the real trend is confirmed during European hours, assuming that the setup to enter on a retracement occurs way before the London close, a retest of the Asian range breakout is a cracking location to look for evidence of a setup with the real trend.
The next situation we can find ourselves in would be one of the most unwelcome price patterns regardless of the directional bias you hold as an intraday trader. The only trader types that are going to be satisfied by this pattern are market makers and range traders.
I call this pattern real trend failure (3.8). In the majority of cases, for this pattern to emerge, there must have been initially a double breaker, but not always the case as we may see an initial Asian range breakout only for price to stagnate near the highs for the rest of the day.
As the chart below shows, we have a first breakout of the Asian range, which ends as a fakeout, only for the opposite side of the Asian range to be tested. From there, the price just simply whipsaws in no particular direction. Notice the 100% proj in either side is never under siege.
If the Asian range is quite volatility, we could face what I’d call an extended Asian range (3.9). Even if this pattern tends to be quite rare for a European currency in Asia, there are a couple of rules one can incorporate to dynamically navigate this nuance and validate the real trend.
The first rule would be what do we consider an extended Asian range? Personally, and this is quite personal, but if I see a move in Asian beyond 40-50% of the daily ATR, I’d be looking for the creative hacks mentioned above in order to assess the validation of the real trend.
The second rule has to do with the price forming a fresh range outside the Asian range hours. If that box is ticked, as the example below illustrates, draw a 100% proj and if the price accepts by breaking this target line, that’s your ‘go ahead’ to engage in trend trading in Europe.
As a caveat. Whenever you face an extended Asian range, be aware that the opportunities available in the European session may not be more limited as the price has already moved a fair share of its daily ATR. This is definitely something to account for in your plan of engagement.
Just as an extended Asian range in the GBP/USD is quite rare, the same applies to the following occurrence. You will be hard-pressed to find situations where the Asian range is not broken (3.10) before the US session comes online. If this scenario occurs, is probably because:
See an example below where due to the last reason stated above, the market goes for a protracted extension of the Asian range until the US session is about to get underway.
Another important concept to never forget is that in a fair number of occasions, these patterns will play out one way or another as a function of the fundamental news published in Europe. Therefore, be aware that fundamentals will impact forex intraday dynamics (3.11).
First tear events such as Central Bank, retail sales, inflation, etc. will determine, to a certain extent, which pattern the market ends up displaying. Bottom line, always pay attention to the economic calendar, including Brexit headlines in the case of GBP, and the drivers.
Another big nuance to always account for is context (3.12).
I cannot emphasize this enough. It won’t matter if you identify a market that qualifies as a real trend intraday if you trade against the underlying flows.
To leave no stone unturned, let’s look at the following two examples. In the first snapshot, we see a clean reversal of the Asian range, which one could have anticipated if only judging by the underlying sell-side flows from the previous day.
In the second example, we have a clean reversal of the Asian range, with the real trend confirmed late on the day, which by itself, as I will explain next, is a red flag. But nonetheless, notice that the move up is in contradiction with the main downtrend based off last day’s flows.
Next up is to touch in a crucial aspect when trading real trends, which as a reminder, get validated by the acceptance beyond the 100% proj line measured from the Asian range box. I am referring of the dangers to trend trading as we approach the London market close (3.13).
As the sessions picture above indicates through a vertical red line, this would be 4h after the NY open. In my local time (Bali, Indonesia), it translates into 1 a.m.
If you are looking to jump on a real trend intraday, make sure it is not after this time. There is a heightened risk that the removal of liquidity once the London boys are done for the day may cause the trend to peter out and see a reversal or stagnation of the dominant flows.
As you can see in both instances below, as the London close approaches, highlighted in a blue rectangle, the market tends to reverse, to a certain degree, the real trend.
There is another major consideration to be given to intraday movements that may lead to an exhaustion of the real trend, either around the London close or even ahead of it. However, when the combo exists, it is such a power signal to be a contrarian trader.
This simple yet powerful tool is the daily ATR (3.14). A typical dynamic in forex is that unless the market is driven by a bombshell, an outsized upbeat in fundamentals or a Central Bank decision, the market is likely to exhaust around its daily average range limit.
Check this example out. The market ends up running out of gas at the exact daily ATR limit, which in this case, is combined with the end of the London session (liquidity dries up).
Last but not least, the definition of targets for the day (3.15). This will be based on the measurement of the 100% bull or bear projections off the Asian daily range. Thie value obtained will provide, with striking accuracy, targets for the market to hit, at every 100% interval.
The areas most relevant to keep in mind as the point of highest interaction/interest for the day include the 100%, 200% and 300% projection targets. It will certainly be quite rare that the market goes much further beyond the 300% proj target unless a fundamental bombshell.
See an example in the chart below:
Under 40% ATR (standard range -> easier to reach proj targets)
Above 40% ATR (extended range -> harder to reach proj targets)
Yes -> standard behaviour -> Potential for real trend developing
No -> Likely due to extended Asian range, public holidays, market on standby ahead US data
Yes -> A monster trade could be in the making
No -> A potential double breaker could be at play
Yes -> Real trend is validated, look to engage in a directional move
No -> The market is still distributing prices before it shows its hand
The 200% & 300% proj, accounting also for round numbers, SRs and daily ATR limit
Yes -> Higher odds of a clean breakout lower or double breaker lower if context is bearish
No -> Be wary that the market could reverse in a dime faking out a clean breakout for instance
Yes -> Wait for the outcome to re-assess the behavior of price
No -> More confident that price action won't be distorted by news
Option 1 - Around the London close as liquidity dries up
Option 2 - Once the 300% proj target met
Option 3 - At the daily ATR limit
As a retail intraday trader, I won’t boast with the expectations that you may take in each and every lesson I provide in this article. The intention is that whatever clicks, you make it your own, by first backtesting these patterns.
At the end of the day, the intention of any educational article should be, certainly the ones that carry my signature, to stimulate your critical thinking and hopefully provide a venue for you to test out new things that can improve your trading approach if it’s so required.
This article in particular is definitely best suited for those active traders that are looking to momentum scalp or swing trade and want to refine the methods applied to assess the type of market conditions or dynamics they are trading European currencies, especially the EUR or GBP.
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