16. Forex trading strategy: GUPPY BURST

Forex trading strategy: GUPPY BURST

How to forex trading with Best forex strategy for M5 with GDP/JPY

The first step in developing a mechanical trading system is to understand and describe market behavior. The next step is to figure out the rules for entries and exits. The guppy burst seeks to exploit trading profits when the market is quiet.

There is a window of around three hours between the close of the U.S.  market and the opening of the  Asian market.  The forex market is relatively quiet during this time and tends to move in a  gentle yet predictable manner.

The market then springs to life again when the Asian market opens. The guppy burst seeks to identify the trading range during this 3-hour window and anticipate a potential breakout of the trading range.

To take full advantage of this potential breakout, I have selected one of the most volatile crosses, the GBP/JPY, commonly known as the guppy among forex traders.

Time Frame for this forex strategy

The guppy burst method works with the 5-minute candle (M5). This means that each candle represents 5 minutes of price movement.

Indicators for this forex strategy

We use only pure price action; no indicators are used for this strategy.

Currency Pairs for this forex strategy

The guppy burst method applies only to the GBP/JPY.

Forex trading strategy Concept

After the trading range is identified, we place pending long and pending short orders. The entry price for the pending long is at the resistance level while the stop loss is located at the support level. The entry price for the pending short is at the support level while the stop loss is at the resistance level.

The profit target is set at twice the amount of the stop loss. As an example, if the stop loss is 50 pips from the entry price, the profit target will be 100 pips. This is a risk to reward ratio of 1:2.

Long Trade Setup for this forex strategy

The reference candle for this strategy is the one that corresponds to 5 P.M.

New York time, which is the closing time of the U.S. market.

Here are the steps to execute the guppy burst strategy for long:

  1. Identify the trading range in the first three hours after the U.S. market closes by referencing the highest high (resistance) and the lowest low (support) in these three hours. (See Figure 10.1.)

  2. Place a pending buy stop order with entry price at the highest high (resistance).

Forex trading strategy: GUPPY BURST

FIGURE 10.1    Identify Trading Range by Referencing Highest High and Lowest Low

Forex trading strategy: GUPPY BURST

FIGURE 10.2    Set Entry Price and Stop Loss

  1. Set the stop loss at the lowest low (support). (See Figure 10.2.)

  2. Measure the number of pips between the EP and SL. The profit target is double that number of pips. In this example, the number of pips between EP (128.16) and SL (127.86) is 30, so the TP will be 60 pips

above the EP at 128.76. (See Figure 10.3.)

Forex trading strategy: GUPPY BURST

FIGURE 10.3 Engage Pending Buy Stop

Forex trading strategy: GUPPY BURST

FIGURE 10.4 Trade Hits Profit Target

From the long example in Figure 10.4:

Entry  price  =  128.16

Stop  loss =  127.86

Profit target = 128.76

The risk for this trade is 30 pips, and the reward is 60 pips. The risk to reward ratio is 1:2, which yields a tidy 6% return if we take a 3% risk.

Short Trade Setup for this forex strategy

The reference candle for this strategy is the one that corresponds to 5 P.M. New York time, which is the closing time of the U.S. market.

Here are the steps to execute the guppy burst strategy for short:

  1. Identify the trading range in the first three hours after the U.S. market closes by referencing the highest high (resistance) and the lowest low (support) in these three hours. (See Figure 10.5.)

  2. Place a pending sell stop order with entry price at the lowest low (support).

  3. Set the stop loss at the highest high (resistance). (See Figure 10.6.)

  4. Measure the number of pips between the EP and SL. The profit target is double that number of pips.  In  this  example,  the number  of pips between EP  (128.12) and SL  (128.33)  is 21,  so  the TP will be

42 pips below the EP at 127.70. (See Figure 10.7.)

From the short example in Figure 10.8:

Entry  price  =  128.12

Stop  loss =  128.33

Profit target = 127.70

The risk for this trade is 21 pips, and the reward is 42 pips. The risk to reward ratio is 1:2, which yields a tidy 6% return if we take a 3% risk.

Forex trading strategy: GUPPY BURST

FIGURE 10.5    Identify Trading Range by Referencing Highest High and Lowest Low

Forex trading strategy: GUPPY BURST

FIGURE 10.6    Set Entry Price and Stop Loss

Forex trading strategy: GUPPY BURST

FIGURE 10.7 Engage Pending Sell Stop

Forex Strategy Roundup

As there is no way to anticipate when the market will reach the entry price,  the best option is to create one pending long order and one pending short order after you have identified the trading range of the three-hour window. Once either of the pending orders is triggered, delete the other pending order immediately.  As an example,  if the pending long order gets triggered first,  delete the pending short order.  If the pending short order gets triggered first, delete the pending long order.

This strategy is suitable for traders who are available during a specific time of the day to execute the trade during the three-hour gap.

FIGURE 10.8 Trade Hits Profit Target

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