Forex Patterns and Probabilities: Trading Strategies for Trending and Range-Bound Markets

CHAPTER 16

The Boomerang

So far, we have discussed a variety of strategies, each based on some tendency of the forex market. There is another tendency that we haven’t yet discussed—the tendency of the forex market to be very quiet at certain times of the trading day.

There is a stretch of several hours, starting after the U.S. forex session ends and prior to the beginning of the Asian session, which tends to be very low in volume. Although the Australian and New Zealand forex markets are active at this time of day, the overall volume is relatively slight.

This is because the “big three” of forex trading (Great Britain, the United States, and Japan) are mostly inactive at this time of day. Under these conditions, currency pairs tend to drift, and any movement in the market becomes highly suspect.

FADING FALSE BREAKOUTS

Breakouts that occur during these hours are notoriously unreliable, because they almost always occur on very low volume. A trending technique would be inappropriate during these hours due to the overall lack of market direction. Since any movement that occurs at this time is unreliable and likely to retrace, we can create a strategy that is designed to capitalize on these false breakouts, by “fading” or trading against them.

Since this time of day is also considered to be the beginning of the forex trading day, it is also the same time that many (but not all) market makers choose to charge or credit interest. However, unlike an interest rate arbitrage strategy, ...