The 3am Grid just doesn't predict straight buy / sells. Sometimes the market breaks in one direction, and before it reaches the day's goal, it reverses.
How to Trade the Reverse
You can trade this reverse several ways. One way is to place a stop/limit on the SELL or the BUY, so when it breaches the order you've entered a SELL when it goes past the BUY, or you've got a BUY when it goes past the SELL. The advantage is that you are always assured of capturing the reverse. The downside is the depth of the breach. If it goes past 50 pips, you've got a lot of sweating before you actually see the reverse.
I play it more conservatively. I wait until it's 10 or more pips past the BUY or SELL, then enter a stop/entry order at either the BUY or SELL. The problem with this approach is that you miss reverses that just touch and fly backwards. Part of my long-term analytics is to determine probabilities on both approaches. More on that in a future post.
The Reverse Trade on March 5, 2009
Yesterday, the 3am Grid predicted that because the 3am GBP candle was 73 pips there was a 75% chance of it reversing after going in a particular direction. Around 5am it broke south, ostensibly tripping the SELL which would've been at 1.4159 with a LIMIT of 1.4032. The Grid would predict that before it got to 1.4032, it would reverse all the way past the high of the day of 1.4180.
My Strategy
All things being equal, I would've waited until it breached the sell, then I would've placed a buy. But today, things were not equal. The Bank of England was going to release their new discount rate, going from 1.00% to 0.50%. The market reacted with a quick move to the south as the currency devalued relative to the US dollar. I was not trading a possible reverse regardless of what the model said.
Systems and Mindless Adherence
The 3am Grid represents months of tracking every 3am trade for several years. The resultant probabilities are solid. Solid in the sense that they are stable over time. If a particular combination of day of the week and sized candle typically hits its LIMIT 75% of the time, that's a solid bet. But having situational awareness is as important in trading as it is in life. I chose not to get into this trade. As it turns out both me and the 3am Grid were right.
Trade Analysis
Boom, at 7am eastern time, the BOE makes its announcement and the currency flies south, breaching the SELL price definitively. The currency never gets to the Grid projected LIMIT of 1.4032, stopping just short at 1.4036.
Slowly, over the course of the day, the currency wobbled with indecision. I started to doubt my decision not to play the reverse. You'll notice that the GBPUSD hit the SELL price 3 times before reversing breaching it for good at 7pm EDT. Unfortunately, the prior three attempts would've stopped me out as the currency would briefly touch the SELL price and tumble backwards 80 and 50 pips.
Ultimately, just prior to the London Open, the GBPUSD completed the grid predicted reverse!
Holy cow, the 3am Grid was right.
Bottom Line
The reverse trade offers a tremendous advantage over the traditional way of trading the 3am GBP candle. It's tricky to trade and I'm working on a methodology that makes sense.
The 75% probability of reverse predicted by the 3am Grid came true. I'd of been stopped out though, because in this case, the GBP seriously wobbled while deciding to reverse course.
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