Strategy concept

The 24-hour forex trading day encompasses all the trading sessions around the globe, starting at 5 p.m. ET and ending the same time the next day. The trading day is split into three distinct sessions: the Far East and Asian session, the European session, and the North American session.

Let’s say data collected over the past couple of months shows the average daily trading range for a certain currency pair was 120 pips (points). Over the same period of time the smallest daily range was 80 pips.

Now assume a typical market situation is occurring around 10 a.m. ET: The current intraday trading range is 60 pips ; the currency pair first formed its intraday low and later formed a top before drifting 30 pips lower — meaning that at this moment the price is right in the middle of the day’s trading range .

The daily range statistics imply the currency pair still has the potential to expand its range today because the current range is much smaller than the two-month average range (120 pips) and even smaller than the minimum range (80 pips) from that period; price must move at least 50 pips up or down from its current level just to match the minimum range.

The odds of an upside extension are better than the odds of a downside extension because the trend for the day is up. In this situation, the day’s low becomes a significant support level and a long trade is opened, with a protective stop just below the support level (risk approximately 30 pips) and a profit target of 50 or more pips.

The profit target could be set anywhere between the point at which the pair matches the minimum daily range over the past two months or the price at which it matches the average range. Optionally, a target could be based on other levels (trendline, alternate support-resistance levels), as well as on timebased criteria — for example, liquidating the position at the closing price of the day.

If the market penetrates the support at the day’s low, the stop will get hit for a 30-pip loss. However, this does not negate the odds the market will reach its average or minimum daily range values before the end of the day; rather, it suggests a high likelihood the pair will extend its range to the downside by at least another 50 pips.

In this situation, you have a couple of choices. The first is to reverse the position immediately at the stop-loss price with the expectation the market will return the 30-pip loss, or perhaps more. The only problem is the appropriate stop level for the new trade would be above the high of the day, which would establish the risk of losing another 50 pips.

The second choice is to wait until the market makes a retracement back into its intraday trading range and then follow the rules used to establish the initial long position, except this time taking a short position.