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Strategy for Trading Strong Trends in the EURUSD (Or Any Market)
This strategy works best on strong trends, but can also be used to find entries during weaker trends as well although strong trends are always the preferred environment to trade in. Used in conjunction with paying very close to the price action and strength, this strategy gets very advantageous prices and allows for large profit potential. An additional benefit is that risk can also be kept quite small.
A trend is not just a relentless move in one direction; it moves in waves, but makes overall progress in one direction. A downtrend starts with a move down, a smaller pullback and then another move lower and so on. The main waves (in this case down) are called impulse or primary waves. As long as the impulse waves are stronger than the pullbacks the trend is likely reasonably healthy.
Strength is determined by distance and speed. Figure 1 shows a strong trend. Notice the impulse waves (in this case down) cover much greater distance than the pullbacks and also have greater velocity than the pullbacks. This shows that sellers are much more interested in selling than buyers are interested in buying.
Figure 1. EURUSD 1 Minute Chart
There is a lot of information on the chart. The left side shows the strong downtrend which we want to be a part of by going short (buying puts). As we move further right on chart the pullbacks get stronger and the moves lower get smaller. This is our indication the downtrend is likely over, or that at least conditions have changed enough that we don’t want to keep taking short positions using the following strategy.
This strategy simply capitalizes the waves structure of trends, as well as slowdowns on a pullback to enter in the direction of the trend. By waiting for a slowdown during a pullback risk can be kept small and the profit maximized.
Here are the basic rules assuming a downtrend, like shown in figure 1 and 2.
- Enter only in the direction of the dominant trend
- Apply Bollinger Bands or a similar indicator to your chart (I use enveloped for a 1 minute chart as described in Forex Day Trades – Oct 7, which covers a different variation of this strategy).
- Only take trades that are near the midband of the Bollinger Bands.
- Only enter when there is a pause of three bars or more.
- The closer entry is to the top of the three bars, the lower risk, but you can enter anywhere inside the 3+ bar slowdown (for an uptrend, ideally enter near the bottom of the slowdown if possible).
- Place a stop several pips beyond the highs the slowdown (for a uptrend, stop is a few pips below lows of slowdown).
- The slowdown of the pullback should have been preceded by a sharp move lower (see figure 2 for the basic idea–for trades 3 and 4 these are still considered to be preceded by a sharp move lower).
- Take profit at approximately 1.5 or 2 times your risk, OR, base your target on the distance of average price runs, as discussed in Make a Little Money Before a lot of Money.
- If there is evidence that the trend is weakening, you can still take the trade but if the price moves in your direction and then quickly fails, get out (the fourth trade in figure 2 is an example of this).
Figure 2 shows the same downtrend we saw before. Now Bollinger Bands have been applied, as well as small boxes which mark relevant slowdowns and trade opportunities.
You enter somewhere in the slowdown box–preferably near the top (for downtrend) since the risk will be less. Place a stop just above the highs of the box. This will depend slightly on volatility and the time frame you are trading on. For 1 minute chart I place a stop about 2 pips above the slowdown. For a 5 minute chart I put the stop about 3 to 5 pips outside the slowdown.
Figure 2. EURUSD Trades on 1 Minute Chart
This strategy does require that you adapt to changing market conditions and realize when the trend is likely over. The first two short trades would have worked out very well. Regardless if you took a profit at 2X your risk (meaning if your risk was 3 pips you take a profit at 6 pips) or held for more as the price accelerated, these trades were strong trend trades.
The third trade is a loser. We get short and very shortly after are stopped out. Notice this slowdown is only 3 bars, so it is very possible this trade would not have been taken at all. The overall trend is still possibly down though. This may just be a bigger pullback after a strong move lower. So a fourth short trade is taken. It moves onside but then fails to move lower.
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Since we already know, based on the third trade, that there is some buying strength, we don’t bother to wait for our stop to get hit and bail on the fourth trade with a small profit, breakeven or small loss. Depending on the entry point is still likely possible to extract a small profit on this trade. We are aware of the possibility that the downtrend is over because the pullback was much stronger and the moves lower have lost their strength.
Once again, the fourth trade is only 3 bar slowdown, therefore it is possible that you may not have been able to take this trade at all, especially if you were waiting with an order near the top of the slowdown.
Define personal rules for yourself about how you will enter on slowdowns so there is no question in your mind on how you will handle these types of situations.
How to Read the EURUSD discusses more on managing trades while they are underway.
In hindsight it looks easy to spot these trades, but in real-time it takes a lot of practice to determine when the market is strong and when trend may be changing. Also depending on where you enter, your risk can vary quite a bit. There is a fine balance between making sure you get a position if you want one, but not getting a worse price than you need to. For exits I usually have a target set at approximately 2X my risk. I will then adjust this slightly based on daily conditions and the whether the trend seems to be weakening or strengthening.
Day Trading the EURUSD – Basics, Strategies, and Indicators
Learn how to day trade the EURUSD — including strategies, when to trade, when not to trade, how to handle news, risk management, position sizing, adapting to changing conditions, and technical indicators that may help you.
The EURUSD is where most of the forex volume happens. It typically has the tighest spread and is ideal for day trading. The GBPUSD is also good, and is my alternative if the EURUSD is not moving well.
Before we get into strategies and tools to use for day trading the EURUSD, standard risk management procedures apply. Don’t risk more than 1% of your account on a single trade. Also, day trading is not easy. There is a high failure rate, and expect to spend at least 6 to 12 months of practice (that is after you have done all your research and found a method that interests you) before you are able to implement a viable strategy profitably. It is impossible to read about a strategy and then be able to implement effectively it right away. Hence the high failure rate. Every day the market is different. No two trading days will ever be exactly alike, so once we learn a strategy we need to practice it for months before we are able to implement effectively in always-different conditions.
This article is filled with links to in-depth articles that provide more details on the concepts discussed. Consider this article a “table of contents” for starting your journey into day trading the EURUSD, where all the links are chapters warranting deeper study.
EURUSD Day Trading Basics
If you want to day trade forex, start with understanding the basics: how much capital to use, which broker to use, proper position sizing, and best times of the day to day trade.
In terms of capital, start forex day trading with $2,000 to $5,000 or more. With this amount of capital, it is possible to start building an income stream. $500 is the minimum anyone should start an account with. This won’t produce an income stream, rather you’ll need to build up the account for some time before it is worth withdrawing any of the gains.
Pick your forex broker carefully. Depositing your money with a broker is one of the biggest trades we make as traders. If they aren’t reputable, or provide poor trading conditions, that money is as good as gone. Open an account with tight spreads and low commissions; this is a requirement for day trading successfully.
Next, we need to know how to handle our position size. As mentioned above, keep the risk on each trade to 1% or less of the account balance. Position size, combined with a stop loss, is what allows us to keep our trade risk below 1%. A stop loss gets us out of a trade if it moves against us, which allows us to keep damage to our account small. These factors all work together to manage our risk, so understand them well before attempting to implement any of the day trading strategies discussed below.
Having the correct position size on a trade, to risk about 1%, requires leverage. Leverage, provided by all forex brokers, means we need less capital in our account than what is required to initiate a position/trade. Most day traders utilize between 5:1 and 10:1 leverage.
The currency market is open 24 hours a day during the week, but certain times of the day are better for day trading than others. Stick to trading the EURUSD during the London session, or during the London/US overlap period. Before London opens, and after it closes (when the overlap period ends), the movement in the EURUSD typically dies down and there are far fewer good trading opportunities.
How Forex Prices Move
No two trading days are exactly alike, yet how prices move stay the same. Prices move in only a few ways, and each day is a combination of these factors. Price moves in waves. How large and small those waves are tell us a lot about whether the price is trending, how strong that trend is, and when a trend is reversing.
Another factor we consider is how fast price waves are moving. If the EURUSD rallies 20 pips in 5 minutes that shows stronger buying interest than a 20 pip rally that takes 10 minutes. As we trade, we need to aware of our surrounding, constantly monitoring the size of the price waves, their direction, and how fast they moving.
Most of the trading strategies discussed below involve trading during trends. Therefore, to successfully implement the strategies the trader must know how to interpret the trend and make an assessment of whether it is likely to continue, reverse, or flatten out. These assessments will, in turn, tell us when we can use the strategies and when we should sit on our hands.
EURUSD Day Trading Strategies
I like to day trade the EURUSD (or GBPUSD) using a 1-minute chart. While tracking all these 1-minute price bars is a little overwhelming at the beginning, it shows greater detail of the price movements than a 5-minute chart, for example. Some people say the 1-minute chart is too busy or “volatile.” It may seem busy at first, but is it no more volatile than any other time frame. The price is moving the same amount regardless of what time frame we watch.
Watching charts can be draining, especially on the eyes. I limit day trading to 2 hours per day. If you trade for longer than two hours, take a brief break before starting to trade again. We want our mind and eyes to be sharp, not tired. A tired brain is more likely to make mistakes and lack discipline.
There are several things I look for while day trading. A strong reversal strategy provides trading opportunities, yet also alerts us when a trend is ending or a new trend is starting.
Once a trend gets going, we need to know how to take advantage of the trend. Trend trades provide roughly 60% or more of my day trades. Therefore, having a good trend strategy gives us ample trading opportunities each day for producing an income.
To get into a trade I watch the trend, and any other conditions (see linked articles) the strategy calls for. Once all those conditions are met, I then watch for a consolidation breakout or an engulfing pattern as a specific signal to enter a trade. It is not actually the consolidation breakout or engulfing pattern that is important though…it is what they represent. They represent a move back in the direction I expect the price to go. THAT is the important thing. I am not too concerned about how many bars a consolidation is, or technicalities like that. I am watching for a turn back in the direction I expect the price to go, and consolidation breakouts and engulfing patterns just happen to often show that transition.
Chart patterns are another thing I watch for. Knowing all the chart patterns is important for analysis purposes (see Forex Strategies Guide eBook), yet for day trading I like to watch for triangles and head and shoulders continuation patterns. But I don’t usually trade these in the “typical” way. Since I am mostly a trend trader, I analyze the trend and then try to get an advantageous entry point based on which direction the price is likely to go once it breaks out of the pattern.
Entering a trade is only part of the equation. As mentioned above, we also need to place a stop loss in the correct position so our risk is managed. We also need an exit strategy for when our trade produces a profit. When day trading, prices turn very quickly. Wait too long, and the profit will disappear. Take profits too soon and too much money is left uncollected. Some of the strategies linked to earlier have recommended exit points. If those work for you, great. If not, there are at least 4 viable exit methods that all day traders should know. Use the exit method that produces the best results for you.
With strategies in hand, it would seem like we are on the road to easy profits. Unfortunately, that is not the case. A baby can click buy and sell buttons. Making trades isn’t the hard part, it is determining exactly when to make them, and when not to trade. This means we must constantly analyze the price action and adapt our expectations based on how the price is moving, determining whether such movement warrants putting our capital on the line.
Trade only when the reward potential outweighs the risk, and conditions are favorable for the price moving in the anticipated direction. Based on the evidence/analysis, I only take a trade if I feel the price has at least a 60% chance of hitting my target before hitting my stop loss (and the target must be bigger than the stop loss). If I don’t feel that confident, then I don’t trade.
How to Day Trade Forex in 2 Hours or Less shows how these concepts are combined for seamless day trading, where we integrate different strategies at different times based on our moment-to-moment analysis of the EURUSD.
Finally, special circumstances call for special strategies. News is one such circumstance. Exit all trades at least 2 minutes before major scheduled news events (marked as “high impact” or red on most economic calendars). Once the high-impact news is released, there’s usually a big price move. After that occurs we can start day trading again. Utilize any of the strategies mentioned prior, or, the Non-Farm Payroll (NFP) Forex Strategy covers how to day trade around news events.
EURUSD Day Trading Tools
It isn’t always easy to spot the trend. The price may be dropping now, but looking at the bigger picture it may just be a pullback in a bigger uptrend. Most new traders are constantly questioning whether their analysis is correct. Only time reveals if your analysis is correct. Record your results, take screenshots of each trading day with your analysis and trades marked on it, and pay attention to what you do well. Focus on strategies that cater to your strengths, and work on your weaknesses by practicing to overcome them in a demo account or with very small positions/risk in a real money account.
Technical indicators may also help with analyzing the price action. Indicators are based on mathematical formulas, which make them rigid. This can be good because we know how they will behave. Once we know how an indicator behaves, it can aid us in making trading decisions. Unfortunately, most people who use indicators don’t understand them. This means they don’t know when the indicator is providing helpful or hurtful information. Indicators are not perfect. At times they may tell us it is a good time to buy, but the actual price movement is telling us to sell or exit our long positions. So there is a tradeoff in using indicators…sometimes they work well, other times they don’t. If you study an indicator you will see when it performs well. At those time, use it. You will also know when it doesn’t perform well. During those times, rely on your own analysis skills as opposed to the indicator.
I use price action only. Rarely do I use indicators.
I do use drawing tools. As I’m day trading, I mark up my charts with trendlines that highlight trends, ranges, triangles, or other chart patterns. I also draw trendlines along important highs and lows that caused the price to reverse trend. A high or low that causes a reversal could be a strong support or resistance area, which is worth paying attention to if the price nears that area again.
Source: My Forex Broker, FXopen
Monitor volatility throughout the day, and over time. During the day, make sure the price waves are large enough for us to make a good profit relative to the amount we need to risk (discussed earlier). If the price has only moved 15 pips over the last hour (during the London or US session–the only time we should be day trading the EURUSD), that isn’t a lot of movement and it is best not to trade. Assuming we need to risk at least 5 pips on a trade, we would need an absolutely flawless entry and exit to make about 10 pips. That doesn’t leave a lot of room for error considering we need to pay commissions and possibly the spread to get in and out.
So, if volatility is low during the day, I don’t trade. If the price starts moving more, then I will consider implementing one of the aforementioned strategies. This is a personal assessment. There is a no magic number that tells you when to trade or when not to trade. It depends on how much you are willing to risk, your risk/reward, your spread/commissions, and which strategies you are using.
Monitoring volatility over time lets us know what type of trading conditions we most likely to face day to day. If the EURUSD was moving 150 pips per day, on average, last month, and this month it is only moving 80 pips per day, that tells us a lot about what kind of conditions to expect. The lower the volatility, typically the fewer trades we will end up taking. Assuming we win more trades than we lose, by trading less often our profits will likely also be lower than during volatile times where there are more trading opportunities.
By monitoring volatility over time we keep our expectations in check. Sometimes the market produces big profit, and other times we need to be content with smaller profits. My big profit times typically come during volatile periods. When the EURUSD and/or GBPUSD are quiet, day trading becomes tougher. We need to be more selective about our trades. Since the price isn’t moving as much we may need to exit trades earlier than expected (our trading time is over or news comes out before our targets are reached), which reduces overall profit. It is still possible to trade profitability during low volatility times, but it helps to actually know when volatility is low. Our trading and mind frame should be more conservative during such times, and more aggressive and opportunity-seeking when there’s lots of movement and volatility.
EURUSD Day Trading Insights
Consider this article a Table of Contents for day trading the EURUSD or GBPUSD. All the links in this article provide greater detail on the points discussed. Read through the linked-articles to gain a better understanding of what it takes to day trade forex successfully. It is not easy. After reading through all the articles mentioned above, it will still take at least 6 months of practicing before consistent profits are likely. Don’t be discouraged if you don’t find success immediately. That’s normal. Keep practicing, noticing how the price moves, and how those price waves can help you determine which trades to take and which to leave alone. Practice in a demo account until you’re showing consistent profits over the course of a few months. Only then consider switching to a real money account.
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3 Simple Strategies for Euro Traders
Euro (EUR) traders speculate on the strength of the Eurozone economy, compared to its major partners. The relationship between the Euro and US Dollar (USD) marks the most liquid forex pair in the world, with tight spreads and broad price movement that supports a continuous flow of profitable opportunities.
While there are many ways to trade the EUR/USD pair, three simple strategies have been consistently effective. These can be executed by forex traders at all skill levels, with newer participants reducing position size to control risk while experienced players increase the size to take full advantage of the opportunities.
- With BREXIT on the horizon and a history of economic instability in the PIIGS countries, the euro has been popular among currency traders trying to profit off increased volatility.
- There are several ways to trade the euro versus the U.S. dollar as well as several other euro currency pairs.
- Here we describe just three basic strategies for trading the euro.
Buy or Sell the Pullback
The EUR/USD trend thrusts in both directions and carries the price from one level to another in a positive feedback loop that can generate considerable momentum. However, this rapid movement tends to fizzle out when the supply/demand equation shifts, often trapping latecomers in positions that will be excited for losses when the currency pair reverses and heads in the opposite direction.
The pullback strategy takes advantage of this countertrend movement, identifying significant support or resistance levels that should end the price swing and reinstate the initial trend direction. These levels often come at prior highs or lows as well as key levels defined by Fibonacci retracements, moving averages and the inception point of the original thrust.
Buy the Breakout/Sell the Breakdown
The pair often grinds back and forth within confined boundaries for extended periods, setting up well-defined trading ranges that will eventually yield new trends, higher or lower. Patience during these consolidation phases often pays off with low-risk trade entries when support or resistance finally breaks, giving way to a strong rally or selloff.
Good timing is needed to take full advantage of this simple strategy. Enter too early and the range could hold and trigger a reversal. Enter too late and risk escalates because the position will execute well above new support or well below new resistance. It’s often a good idea to reduce timing risk by opening a partial position when the pair breaks out or down and adding to it on the first minor retracement.
Enter Narrow Range Patterns
The pair will often rise or fall into a significant barrier and then go to sleep, printing narrow range price bars that lower volatility and raise apathy levels. Coincidentally, this quiet interface often marks a powerful entry signal for a breakout or breakdown. This strategy enters the position within the narrow range pattern, with a tight stop in place in case of a major reversal
This setup often prints an NR7 bar, which marks the narrowest range price bar of the last seven bars. Originally observed in the U.S. futures markets in the 1950s, this powerful but simple pattern predicts that price bars will expand in a sizable breakout or breakdown. It’s also a low-risk entry because the stop loss can be set very close to the entry price.
The Bottom Line
New and experienced Euro traders can execute these three simple but effective strategies that take advantage of repeating price action.
Equity traders can also apply these techniques with Currency Shares Euro Currency Trust (FXE), which tracks the forex pair in real-time. Leveraged and inverse ETFs can also be traded if you have the skills needed to manage the additional risk. ProShares Ultra Euro (ULE) offers double long side exposure, but it is thinly traded, at just 24,283 shares per day on average. ProShares UltraShort Euro (EUO) offers equal leverage to short sellers and greater liquidity, trading more than 700,000 shares per day on average.
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