End of day trading allows you to benefit from the volatility in the Forex markets in a time efficient manner.
Once a day, on the New York market close, you can assess the daily charts and make decisions about what to buy and sell, as well as how to manage your existing positions.
There is no need to watch the markets all day. As you have more time, you can trade a greater number of markets and run multiple non-correlated strategies.
One of these strategies that is well-suited to end of day trading is breakouts. Here is one way you can trade breakouts in a somewhat systematic fashion.
What is a breakout?
The Forex market contracts into periods of little movement (low volatility) and then expands into trends. Capturing the moment the market begins its expansion into a trend can be a nice way to trade, as:
- You are getting in near the beginning of a trend;
- You are not trying to pick a bottom.
This means you can have some big winning trades (as the trend still has a long way to go), but also keep the win rate relatively high (compared to picking bottoms).
How to capture breakouts
My favourite way to capture breakouts is to wait for a low volatility (low vol) range to form and enter a trade on the first move outside the range that has formed.
Here is an example of a recent trade:
You can see that I use the Bollinger Bands to give me a non-discretionary definition of one of these low volatility periods. Typically, I want to see the Bollinger Bands width indicator fall below 25 and then see the price close above the Bollinger Band in the direction of the trade.
Rule #1. Wait for the Bollinger Bands width indicator to fall below 0.025.
Rule #2. Wait for the price to close over the Bollinger Band in the direction of the trade.
Note, you need to use daily charts with New York close Candlesticks for this.
The key to breakout trading is that you have larger winning trades than you have losing trades. To achieve this, you need to place a stop-loss. I measure a 1.5% move of the currency and place my stop-loss there. This is not overly optimized and anywhere between 0.5% and 2% is going to work. It will simply change the win rate and risk/reward ratio.
The reason I use the 1.5% is I want to keep the win rate high on the signals I send out. If the win rate is too low, the signals can be hard for people to follow.
Where you set it will depend on your risk tolerance and trading objectives.
Rule #3. Place a stop-loss at a distance of 0.5-2.0% away.
Let profits run
One of the key reasons traders fail is they don’t let their profits run. As soon as they earn a profit, they get emotional and close out of their trade.
In order to let the profits run, you need to set a pre-planned exit strategy. To do this, put a profit target on the next major level. To identify this level, I look at a weekly chart for the nearest support and resistance level.
Then I go back to the daily chart.
Rule #4. Place a target on the closest weekly support or resistance level.
Often, the trade does not go to the target and it does not make sense to give all your profits back if the market reverses. To this end, we apply a trailing stop using the supertrend indicator with the settings of factor 2 and periods 7.
I physically trail my stop up just below the supertrend indicator.
Rule #5. Place a hard-trailing stop on the supertrend indicator.
Adapt to what is going on in front of you with trade management
Once you enter, the markets can do many different things, so sometimes it makes sense to adjust your exit strategy based on what is going on in front of you.
You can exit on strong reversal patterns and fundamental catalysts (against your position). You can also consider trailing the stop tightly in fast-moving markets or using a 1:1 risk/reward stop if the price gets close to your target.
Here is an example of using tighter trailing stops on part of the position as the market went a bit parabolic.
When you exit using trade management rules, it pays to scale out of the position, rather than exit all in one go.
Rules #6. Use discretion to manage your trade as it goes in your favour.
Be aware that trade management is powerful, but it is dangerous in the hands of emotional traders. Don’t use it to justify cutting profits short and always record if your trade management helps or hinders your trading in your trade journal.
The importance of using a ranking system
While the trading model above is quite simple, there is great benefit to using a variety of inputs to determine the quality of the trade. This allows you to trade more on your good ideas and less on your bad ideas.
As you place each trade, give it a rank of either A, B, or C.
A quality trades are the best ones, the ones that you really like. B quality trades are your bed and butter trades that produce the majority of your profits. C quality trades are where you get an entry signal, but it is weak or you don’t like the trade. You can trade much smaller (or not at all) on these trades.
Ranking trades allows you to use all the knowledge and experience you have built up over the years, while keeping the strategy and decision-making progress simple and clear.
Practice makes perfect
End of day trading in Forex is a great way to trade.
It is not time-consuming, nor do you need to be constantly glued to the markets.
By trading breakouts, you have the opportunity to capture some nice trends and can keep the win rate relatively high.
It does take disciple and practice to implement this type of strategy day after day. You will have losses to deal with and you need to hold on to your trades and not cut your profit short.
If you have any questions, please let me know.
About the Author
Sam Eder is a currency trader and author of The Consistent Trader and the Advanced Forex Course for Smart Traders (get free access). He is the owner of www.fxrenew.com a provider of Forex signals from ex-bank and industry traders (get a free trial). If you like Sam’s writing you can subscribe to his newsletter or get FREE access to his acclaimed How to Be a More Consistent Trader Short Course.