The forex market has swung into action recently with big moves taking place in the U.S. dollar. After a period of historically low levels of volatility, these recent trends are music to the ears of momentum traders.
With the Fed’s taper due for completion, the market is shifting toward the anticipation of a normalization of rates through increases. This is driving investment into the U.S. dollar (NYBOT:DXZ14). The funding for that investment is coming from areas of the world where the there is an expectation of future easing as a result of economic weakness, as from the European Central Bank. Therefore, we have diverging monetary policy between the Fed and the ECB. Diverging markets are what creates strong FX trends as capital hustles towards the higher yielding currency.
As a result, the trend in the EUR/USD since its May 2014 high has been relentless and swift. As the trend developed, volume increased to levels that we haven’t seen since 2012.
In addition to the fundamental backdrop and strong trend that has developed, the EUR/USD is both the most actively traded currency pair and the most inexpensive to trade. By the time you factor in the spread cost plus commission, the average cost to trade is approximately one pip.
Trading opening range breakouts
Opening ranges are like duct tape—there are a lot of different uses for it, and you can alter it to fit your needs.
Trading opening ranges on a breakout is a popular method as there are many different variations one can make to the strategy. For example, you could trade an opening range for the day week or month. Because we are trading the EUR/USD, let’s focus on the opening range of the European trading session.
For those unfamiliar with opening range breakouts, the concept behind this strategy is to mark off an opening range high and low and then establish breakout trades based off those identified levels. The objective is that if prices are going to trend, they’ll do so after the opening range has been established, when the liquidity typically comes online.
The European trading day begins at 3 a.m. EST. Therefore, we’ll block off the first hour of European trading, from 3 a.m.–4 a.m. ET to establish our opening range.
We will look for breaks on the chart after 4 a.m. ET to the European close at 11 a.m. ET. It is during the London and U.S. trading sessions when the EUR/USD spreads tend to be the tightest.
The chart time frame isn’t as important because this strategy is based on certain times of day. However, you can utilize any chart time frame of one hour or less so you can incorporate any of your favorite technical studies into the plan.