Forex Trading Tips: Lessons From the 00 Setup

Lessons From the 00 Setup

As we pass the half year mark I think it a good time on this holiday weekend to review the round number set up and see what lessons can be drawn from its various permutations. The first and foremost lesson is that the setup in its raw form is NOT a strategy. Any trader naive enough to believe that you could simply replicate a few simple rules and trade them mindlessly for a guaranteed profit will instead quickly blow out his account.

The 00 setup is instead a guideline, an architectural framework at looking at the FX market in a certain way. To succeed it requires a a proper combination of both technical and fundamental drivers and most importantly it requires selectivity and unwavering discipline to control risk. So far this year I have shown you two possible ways to trade 00 set up - anticipatory and direct. There is a third way (in my opinion the best way) but I will save that discussion for next week when we are all back from the beach.

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In the meantime let's review the granddaddy of them all - the original anticipatory setup.

This is actually a very strong and robust trading idea but with the benefit of experience I would make a few changes to it.

• First of all I would trade the setup with 2 units. I would now make my stops -30, so that if I am long 80 I don't get shaken out at 60 but instead get taken out at 50 because a break of 50 is a much more bearish signal that the longs don't have power to run through the figure.
• Secondly I would only take teh trade is I was following a very string fundamental driver - a key point that many ignore at their own peril.
• Thirdly I would set my T1 t +15 or 95 rather than 00, because if there are a lot of option barriers the 00 will be defended vigorously and the run may fail the first few times. This way I will have banked at least some partial profits and would set the stop for rest at break even.
• Finally I would set my T2 at +40 so I am long at 80 I would try to limit out at 20 on the other side of the figure because in order for this setup to be profitable in the long run you need to be able to collect a few bigger winners along the way

Another variant of this idea is to trade direct - that is to trade only when the price actually takes out the 00 figure for a follow through profit.

This is a classic momentum trade and like the first one it requires a strong fundamental driver as a key component of success. Momentum trades are inherently more risky because you often wind up selling bottoms and buying tops. For that reason I would modify my risk/reward parameters to +15/-15 selling 00 with a 85 target and 15 stop for shorts and vice versa for longs and if my selectivity is at least 55% accurate I have an edge in the setup over the long run.

Finally take a look at the latest variation on the idea for a hint of what I will discuss next week. Happy Holiday from BK

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