Forex Cash Cow part 2

The bigger the moves a currency pair makes the higher are the chances of success using this strategy. This is why I chose to use the GBP/USD pair; it has the largest short term moves of all currency pairs.

Many market analysts/system designers/technicians claim that for a trading strategy to be good it has to work in every single market. I strongly believe the opposite. For me, every market has its own personality. This is why I adapted this strategy to the GBP/USDpair. I think its personality is the most adequate for trading the Forex Cash Cow strategy (or any other trend following strategy).

The problem I encountered when designing this strategy was how to establish that a trend has started without it being too late to place a good risk/reward trade. I found that there are two problems with trying to identify and join a trend. First, you caneasily get tricked into thinking that a trend has started only to find out some time later that this was a fake move. Second, by the time you spot a valid trend it is either to late since it is ending or if it is not ending a very good reaction is due which could easily hit your stop loss.

The first requirement that must take place is an intraday “explosion” in price. We want to see the market being extremely bullish or bearish within a relatively short period of time. For our purposes “a short period of time” means one trading day (measured on a daily bar chart). I found that if the GBP/USD pair moves 140 pips or more to one direction in one trading day an “explosion” in price has taken place and the trend will probably continue into the next trading day or two. The 140 pips is a very important number.

Less than that and it is probably just a common intraday swing which does not provide any insight as to whether a good trend is possibly developing. It is not an every day occurrence that the GBP/USD moves 140 pips or more (in a single day), it probably happens an average of six or seven times a month and that is why it is so special. As a general trading rule, the less often a certain trading opportunity occurs the more profitable it can be.

Once we spot an explosion in price as described above, step two comes into play. On the next trading day we want to see the market move 70 pips in the direction of the price explosion. We enter the trade in the direction of the move at a distance of 70 pips (it will not always be exactly 70 pips as you will see later on when the 30 pip rule comes into play). Don't worry, it is all very easy to calculate as you will learn shortly.

A stop loss of 60 pips is immediately placed. The exit is either a profit target of 100 pips or a time target of 11:30 of the next day, whichever is reached first.

Let’s go over several examples. All times New York time.

Continue to see Cash Cow Example 1