The Big Ben strategy

Big Ben is a currency-specific trading strategy designed to capture the first directional intraday move that often occurs within the first few hours after the Frankfurt/London market openings, which begin at approximately 1 a.m. ET. The strategy works best with the British pound/U.S. dollar (GBP/USD) rate.

Because this currency rate trades lightly outside of London trading hours, the surge in trading every morning in the U.K. gives it a “real” market opening, which the strategy looks to exploit. Figure 1 shows pound/dollar trading is virtually nonexistent during Asian trading hours. When London opens, however, the pound/dollar accounts for nearly one-quarter of all forex trading. Currency rates with more continuous, 24-hour trading will have less of a distinct open/close as they pass through the different money centers.

For example, the dollar/yen rate (USD/JPY), which dominates forex activity during Asian trading hours (78 percent of volume), still accounts for 17 percent of trading during European hours.

Before explaining the specific logic behind the methodology, let’s take a look at what needs to occur for a trade to set up.

The rules

The following rules are for short trades, but the strategy can be reversed to trade on the long side.

Setup:

1. The pair makes a new range low at least 25 pips (a pip is the forex equivalent of a tick, or minimum price fluctuation) below the opening price after the early Frankfurt/London trading in the GBP/USD rate begins around 1 a.m. ET.

2. The pair then reverses and trades 25 pips or more above the opening price.

3. The pair then reverses once again to trade back below the intraday low established in step 1.

4. Sell a breakout (at least seven pips) below the London low.

5. Once filled, place an initial protective stop no more than 40 pips above the entry price.

6. After the market moves lower by the distance between the entry price and the stop, cover half the position and trail a stop on the remainder.

These simple rules position you to profit from common behavior that can occur in the pound/dollar when the London/European market opens.


The logic

As mentioned, the pound/dollar rate tends to have lower trading volume outside European/London trading hours because the majority of GBP/USD spot deals are worked through U.K. and European dealers. This gives the European/British interbank community tremendous insight into the currency pair’s actual supply-demand picture.

The Big Ben trade sets up when interbank dealing desks use this intelligence to trigger stops on both sides of the market, resulting in new intraday highs and lows. Once these orders are cleared from the books, the market is primed for its first real directional move of the day, which is what the strategy is designed to capture.

The logic behind this trade should be familiar to S&P futures traders, as it is similar to many opening-range breakout strategies used to capitalize on the first real move of the day after the cash stock market opens in New York.


Trade examples


Figure 1 shows a prototypical Big Ben trade on a five-minute chart. The first vertical line marks midnight ET. The second vertical line denotes the Frankfurt open and the third line shows when London players begin entering the market.
When the Frankfurt market opened, the pound/dollar first moved lower, taking out any nearby sell stops. Within 15 minutes of London entering the picture, however, the market reversed to the upside. The pair was now free to make the first real directional move of the day, and it fell 90 “pips” before buyers stepped in.


Figure 2 illustrates a variation of the Big Ben strategy that commonly occurs when there is an abnormally wide opening range. In this case, the pound traded up 26 pips after the London open to 1.8583, establishing the top of its range. It then came under pressure and sold off 65 pips to make a low of 1.8518 (horizontal line). Next, the currency traded up 50 pips before reversing and plunging below the former low. In this case, a trader could still justify entering a position, since the basic principles behind the trade were still present.

The Big Ben currency day-trading strategy allows you to limit initial risk and capture good moves early in the London trading session. The product of years of watching the currency markets, the approach is based on the workings of the global forex market and attempts to exploit its structure.


KRISTIAN KERR

CURRENCY TRADER • September 2004