A Simple Strategy for Trading the GBP/USD with Nadex Binary Options

If you are new to trading the markets, or if your schedule doesn’t permit you to trade when the markets open in New York, there is a strategy for trading the GBP/USD currency pair using Nadex binary options that can be effective and profitable. This strategy allows you to quickly make an overnight observation, set an entry point, execute a trade and go back to sleep without worrying.

Every trading day, as the Forex currency markets open, there is a one hour overlap between the opening of the London session and the close of the Tokyo session. This overlap occurs between 3:00 am and 4:00am EDT. It is estimated that over 40 percent of Forex trades are processed through these two trading hubs, so there can be high volume and volatility within that one hour time window. As the London market opens, large volumes of transactions are processed, which often produces a corresponding spike in activity  between the Great Britain Pound (GBP) and its related currency pairs, including the GBP/USD. This spike can be bullish or bearish, but it is usually very obvious, has momentum and reveals itself no later than 5am EDT.

 One popular trading strategy observes that the high or low of the GBP/USD session will be usually established between 2:00am-5:00am EDT. The corresponding low or high will occur between 8:00am-2:00pm EDT after the opening of the New York market. If you are confident that the daily high or low of a trading session is setting up at the open of the London trading day, then determining the direction of the market for the rest of the day can be a simple binary “up or down” decision.

Forex Market Hours. All Times are EDT (New York)

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This strategy, known to some Forex traders as the “London Open Breakout Strategy”, has been successfully used and backtested for years. Forex traders use this information to find the right entry point, and to set their profit and stop/loss targets. With Nadex binary options, if you see a strong directional move in the GBP/USD with obvious momentum, then you are making a simple “upward or downward” decision about the direction of the market, choosing an entry point, and setting your contract expiration to 3:00PM EDT that day. When you are “right”, each contract settles at $100 at expiration. If you are “wrong”, the contract settles at $0 at expiration. If the trade is working in your favor, but starts to retrace and threaten you, you have the option to settle your contract early to take a partial profit, break even or minimize losses.


 Nadex GBP/USD Chart for 7/11/2014

In the example above, the GBP/USD pair chopped sideways when the market opened at 2:00am EDT. At 3:00 am, the London market opened, and started chopping downward before spiking to a daily high at 1.71500 at 4:20am. Then the  GBP/USD started to plummet. It looked like the probable high for the day had been established. The next task was to find a trade that had an optimum risk/reward ratio. A contract was available to SELL the GBP/USD pair for $42 per contract, putting $58 per contract at risk. Three contracts were sold, and here were the trade confirmation details:

Trade Details:

Contract: GBP/USD >1.7140 (3PM)

Expiration: Fri Jul 11 15:00:00 EDT 2014

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Direction: SELL

Quantity: 3

Price: 42.00

Note: Exchange trading and expiration fees have been excluded

This contract was based on the proposition that the GBP/USD would be greater than 1.7140 by 3:00pm EDT. If you bought that contract, then you assumed the market would close above that proposition , and therefore be “true”. But the market was falling, so the decision was made to sell the contract, assuming that the proposition would be “false”.

As the chart illustrates, by the time the New York market opened at 8:00am EDT, the GBP/USD pairing was well on its way to a session low at 9:20am, and the contract was never threatened, winding up $126.00 in the money, less $5.40 in trading and expiration fees.

When you backtest this strategy, you will notice that it is relatively easy to identify the session high or low within the first three hours of the trading day (2:00-5:00am EDT). The corresponding low or high will also be revealed after 8:00am EDT. If the market chops sideways in the morning and you can’t find clear market direction or momentum, then you are assuming unnecessary risk, and you don’t want to use this strategy for that day.

The preceding article is from one of our external contributors.
It does not represent the opinion of Benzinga and has not been edited.

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