The setup

The strategy consists of the simultaneous entry of a sell order above the market and a buy order below the market. The purpose of the sell order is to fade an up move and the buy order is entered to fade a down move. In either case, the strategy is based on the idea that any directional movement during this period will be short-lived because there is unlikely to be much volume behind it.

These price moves are most likely caused by an order (or group of orders) that would not normally have the power to move the market. This movement should be followed by a correction, or retracement, which is the move the strategy seeks to capture.

Place the sell order 15 pips above the “opening price” (at 5 p.m. ET) and the buy order 15 pips below the opening price. (Because this strategy is only designed for the EUR/USD, fixed-pip parameters can be used. If other currency pairs were being used, it would be impossible to use fixed parameters because of the volatility and spread differences among the various pairs.)

The exit point for both trades is the opening price. The protective stops for both should be 15 pips away from the entry point, creating a risk-reward ratio of 1-to-1.

If either side of the order is filled, cancel the other order. If no orders have executed within two hours of the open, all open orders must be canceled.

The reason orders must be canceled is because Asian markets tend to become active around 7 p.m. ET, and as a result an increase in volume and volatility should be expected. Since the strategy is designed for use in a low-volume trading environment, the increased activity from traders in Tokyo, Hong Kong, and other Asian market centers will create a trading environment that is too liquid or this strategy.

When this additional liquidity enters the market, any price move in currencies is more likely to have real volume behind it, and therefore it might not retrace. A strategy that fades breakouts would be inappropriate under these circumstances, since there is a chance institutions or other large traders are committed to the move.

This method of trading is simple but effective because exchange rates rarely make big moves during the “dead zone” between the U.S. and Asian sessions. For the protective stop to be reached, the exchange rate for the EUR/USD pair would have to move 30 pips in one direction — 15 pips to trigger the entry, plus 15 more pips to trigger the stop — a move that would be rare at this illiquid, nonvolatile time of day.