EURUSD & GBPUSD achieved ATR targets…Be wary of potential false breaks

In last Monday’s Live Trading Session we discussed ways to potentially navigate the current trading environment and one of the topics which arose was the European Opening range/breakout strategy. As many of you know, this is one of my favorite strategies and while it will typically focus on EURUSD, it could be applied to any of the European majors.

For those of you unfamiliar with this strategy, here’s the basics:

• Identify the high and low during the half hour just prior to the London open (2:30-3am ET) and then look for a breakout of this range +/- 10 pips (or 1/10th of the daily ATR) & to maintain above/below this level for 10-15 minutes – This is done to try to detect a direction of the ‘flow’ for the remainder of the day.
• From there, we like to manage this bullish or bearish bias by focusing on 1, 2 or 5 minute charts and utilizing a combination of moving averages (13-sma, 144-ema & 169-ema) & oscillators (RSI, Stochastics & CCI).
• Other factors to include are major news announcements (usually in efforts of avoidance) as well as the time of day (when major markets open/close, option expirations, fixings, etc.).

Ideally, if price is struggling near these events (typically spotted by a bullish/bearish divergence with an oscillator), then it could be prudent to reduce the position size ahead of time. Additionally, this type of approach may help to minimize the emotional aspect to trading, since there’s an identifiable area to know where you’re wrong (the opposite side of the breakout’s high/low).

General observations regarding potential Opening range scenarios per week (this should NOT be expected, just overall findings):

• 2 days of the week – Won’t do much (finish roughly flat)
• Once a week – False break & potential reversal
• 1 day a week – Respectable movement (50-70 pips from highs/lows)
• 1 day a week – Reaches ATR target (pip amount general equal to Average True Range using a 14-day period)

Note: If the ATR is achieved earlier in the week, the likelihood of it occurring twice in the same week is dramatically reduced – If it does occur it’s typically in opposing directions.

AS demonstrated in the charts below, both EURUSD and GBPUSD bottomed between 2:30-3am ET and moves higher were projected by a bullish moving average signal as the 13-sma crossed above the 144 & 169 ema’s. Sure enough, both pairs broke above the range shortly thereafter and stronger than expected UK Industrial & Manufacturing Production data saw Cable to break meaningfully to the topside and as a result GBPUSD achieved the intraday ATR target of 1.6683 within minutes of the announcements (see exhibit 1). As for the Euro, it continued to remain above the 144 & 169-ema’s and RSI persistently broke above the key 60/65 zone – Thus, there was no reason to divert from the intraday bullish bias. Accordingly, the EURUSD reached its corresponding intraday ATR target of 1.3807 just after the US equity market open (see exhibit 2).

More importantly, since the EURUSD & GBPUSD ATR objectives were achieved today, this suggests we should remain high alert for potential false breaks and choppy market conditions for the remainder of the week. That said, if we were to see another large directional move emanate from the onset of the European session over the coming days, this strategy suggests it may be seen on the downside – Of course there is NO guarantee that any of this will actually occur later this week, as this is just an extrapolation of observational findings with regard to the European opening range breakout scenarios.

Exhibit 1:

Chart Source: Forex Charts by eSignal

Exhibit 2:

Chart Source: Forex Charts by eSignal