Ask novice traders what's most important in trading and they'll probably offer an answer along the lines of "making money". Ask a seasoned trader the same question and the answer is more likely "capital preservation". If you can't preserve capital (big losing trades), then making money is impossible and you will fail. If you can preserve your capital (small losses), then you at least give yourself a chance at success. The most useful trading approach, one that allows me to maximize position size with tighter stops, is one that focuses on opening ranges. I was introduced to this concept by Mark Fisher's book, The Logical Trader, which I highly recommend.
Understand that a trading approach is completely different than an analysis approach. Your analysis approach may consist of technical, fundamental, psychological, astrological, or random factors (or a combination). Your analysis approach should result in a determination of bias (bullish, bearish, or neutral). My analysis approach centers on Elliott wave, sentiment, momentum (RSI) (for more on how I analyze the market I suggest my book Sentiment in the Forex Market), and longer term opening range considerations (weekly, monthly, and even yearly) but these approaches don't allow me to objectively enter the market with tight stops (Elliott is not objective. RSI and long term opening ranges don't allow tight stops and sentiment is probably neither). Once I've analyzed markets and determined my bias, I trade the opening range in the direction of my bias.
Opening Range Times (all times New York)
Australia - 6:00 - 6:30 pm
Tokyo - 7:00 - 7:30 pm
Europe - 3:00 - 3:30 am
North America - 9:30 - 10:00 am
At it's core, an opening range strategy is a short term breakout strategy. Breakout strategies work best with higher volatility. As such, I have focused on the AUDUSD in recent months, a pair with high volatility. I pay attention to the Australian opening range (AUD side), European (risk trends) and North American (USD side). If you were trading the Yen (who would do that?), then you would focus on the Tokyo range.
AFTER the opening range, determine the breakout points for longs and shorts. A filter is needed in order to protect against false breakouts. I use 10% of the 20 day ATR. Experiment with other filters but consistency is paramount.
For example, the 11/22 opening range for AUDUSD during Australia was 9831-9844. 20 day ATR was 168. The bullish breakout point would be 9844 + 10% of 168 = 9844 + 17 = 9861. The bearish point would be 9831 - 10% of 168 = 9831 - 17 = 9814 (chart below shows opening ranges in black, long points in blue and short points in red). The AUDUSD traded 9856 at 8:10 (failing to reach the bullish level) reversed and triggered the bearish level at 8:20. A stop is placed above the post opening range high at 9860 to account for spread. The trade can be managed with the following opening ranges (Europe would have triggered a short as well and the stop would be moved to the post European opening range high of 9785) but always have a target in mind as well. In this case, 9700 was the confluence of pivots on several time frames and a level that was targeted.
Prepared by Jamie Saettele, CMT
This is just an introduction but hopefully whets your appetite for a more thorough investigation.
--- Written by Jamie Saettele, CMT, Senior Technical Strategist for DailyFX.com
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Jamie is the author of Sentiment in the Forex Market.