Trades against the double zero levels

One of the most overlooked aspects in trading although it is one of the most lucrative if properly understood, is the market structure. Having a deep understanding of market dynamics and microstructure gives the trader a huge advantage and is one of the best tactics to profit with changes in the price of the currencies at intraday level. This is key for traders who prefer short-term trades.

In the Forex trading thist is crucial, because the main influence on the price movement in the intraday market is the order flow. Since in most cases, individual traders do not have access to order flow data, day traders seeking to profit from short term fluctuations have to learn to identify price areas where large orders flows should occur so that they can anticipate these orders flows in the right moment. This trading strategy is extremely efficient for intraday traders because it allows them to keep pace with the market makers.
When we trade at intraday level, we can not look for rebounds in all levels of support and resistance and expect winning trades in all cases. The key to a profitable intraday trade is that the trader should be selective and just open positions at the levels where there is a greater probability that a reaction will occur. For example, opening positions in psychologically important price levels, like round numbers or double zeros, is a good way to identify such opportunities.

Double zeros are simply prices in which the last two digits are zeros, such as 1.3400 in the EUR/USD or 101.00 with the USD/JPY. If you notice how many times the price of a currency pair bounced off support/resistance levels corresponding to double zero prices at intraday level in spite of the underlying trend, you can also see that usually these rebounds are much larger and more important than those produced in other price areas and under other conditions. For this reason, this market reaction is perfect for intraday traders who perform trades on the Forex market, as they have the ability to get between 30 to 50 pips of profit only risking 15-20 pips.

In addition, the implementation of this methodology is not complicated, but requires that the trader fully understands the psychology of market participants and dealing desks. Why this strategy works so often? The answer is that the big banks have access to the flow of conditional orders so they have a distinct advantage over other market participants. The order books of these companies offer them a clear idea about the possible market reactions to different price levels. Thus, the same banks and dealers will use this information in their own strategic advantage to open short term positions in their own trading accounts.

In general, market participants, as a whole, tend to place conditional orders near the same price level or around these. While stop loss orders are normally placed above round numbers, traders place their orders to take profits in the same round numbers. The reason for this is that traders are human beings and as such tend to think in round numbers - is a matter of psychology. For this reason, round numbers are the price levels in which are usually placed to take profits in winning trades.

Since the Forex market operates continuously 24 hours a day, speculators employ conditional stop orders or limit orders with a much higher frecuency than in other financial markets. The big banks that have access to conditional orders flow data, seek to exploit and profit with these position groups, for which its main strategy is to accelerate the execution of the stops.

Thus, the strategy of conducting trades against double zeros levels aims to place regular traders on the same side of the main market makers such as the big banks, and basically puts them in a good position in the market. This allows them to take advantage from a quick change in the price against the general trend that begins at the level of double zeros. 

Usually, this type of transaction is more likely to succeed and is more profitable when there are other technical indicators that confirm the relevance of the level of double zeros.

Rules of the strategy

Long positions

  • Identify a currency pair whose price is well below a simple moving average of 20 periods in a 10 or 15 minutes price chart.
  • If price is a few pips below a double zero, we can open a long position several pips below the figure (no more than 10 pips).
  • Place a initial stop loss as protection 20 pips below the opening price.
  • If the market moves in the same direction of the position and the price reaches a level at which the trade produces twice the amount of risked pips in the initial stop as benefits, we can cover half the position and move the stop loss for the rest position to the opening point in order to balance.
  • Move the stop loss as the price of the currency pair moves with the rest of the position.

Short positions

  • Identify a currency pair whose price is well above a simple moving average of 20 periods in a 10 or 15 minutes price chart.
  • If price is a few pips above a double zero, we can open a short position several pips above the figure (no more than 10 pips).
  • Place a initial stop loss as protection 20 pips above the opening price.
  • If the market moves in the same direction of the position and the price reaches a level at which the trade produces twice the amount of risked pips in the initial stop as benefits, we can cover half the position and move the stop loss for the rest position to the opening point in order to balance.
  • Move the stop loss as the price of the currency pair moves with the rest of the position.

Ideal market conditions for the strategy

This trading strategy works best when the following conditions exist:
  • The previous price movement occurs without a major economic data or news that has acted as a catalyst, ie that market conditions must be calm before performing the trade. When relevant news and economic data are published the market becomes highly volatile and prices can move through the double zeros easily without bouncing.
  • This strategy has a higher success rate when used in currency pairs with tighter trading ranges and pairs that have commodity-linked currencies.
  • It is a strategy that works well for the major currency pairs, but on relatively quiet market conditions, because it uses tight stop loss that can be easily reached in volatile markets.

Optimization of round numbers trades

The round numbers price levels that are psychologically important have even greater relevance if they match a key technical level, ie an important support or resistance. Therefore, this strategy has a greater chance of success when the round number matches key support levels or resistance such as moving averages, the main Fibonacci levels, pivot points, Bollinger bands or historical supports and resistances.

Example

Doble zero levels strategy




 
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