22# Fading The Double Zero Trading System

This is an intraday technique and is very efficient write by Kathty Lien.

Strategy Rules

Long

1. First, locate a currency pair that is trading well below its intraday

20-period simple moving average on a 10- or 15-minute chart.

2. Next, enter a long position several pips below the figure (no more

than 10).

3. Place an initial protective stop no more than 20 pips below the entry

price.

4. When the position is profitable by double the amount that you risked,

close half of the position and move your stop on the remaining portion

of the trade to breakeven. Trail your stop as the price moves in your

favor.

Short

1. First, locate a currency pair that is trading well above its intraday

20-period simple moving average on a 10- or 15-minute chart.

2. Next, short the currency pair several pips above the figure (no more

than 10).

3. Place an initial protective stop no more than 20 pips above the entry

price.

4. When the position is profitable by double the amount that you risked,

close half of the position and move your stop on the remaining portion

of the trade to breakeven. Trail your stop as the price moves in your

favor.

Market Conditions

This strategy works best when the move happens without any major economic

number as a catalyst—in other words, in quieter market conditions.

It is used most successfully for pairs with tighter trading ranges, crosses,

and commodity currencies. This strategy does work for the majors but under

quieter market conditions since the stops are relatively tight.

Further Optimization

The psychologically important round number levels have even greater significance

if they coincide with a key technical level. Therefore the strategy

tends to have an even higher probability of success when other important

support or resistance levels converge at the figure, such as moving averages,

key Fibonacci levels, and Bollinger bands, just to name a few.

Examples

So let us take a look at some of the examples of this strategy in action.

The first example that we will go over is a 15-minute chart

of the EUR/USD. According to the rules of the strategy, we see that the

EUR/USD broke down and was trading well below its 20-period moving

average. Prices continued to trend lower, moving toward 1.2800, which is

our double zero number. In accordance with the rules, we place an entry

order a few pips below the breakeven number at 1.2795. Our order is triggered

and we put our stop 20 pips away at 1.2775. The currency pair hits a

low of 1.2786 before moving higher. We then sell half of the position when

the currency pair rallies by double the amount that we risked at 1.2835. The

stop on the remaining half of the position is then moved to breakeven at

1.2795. We proceed to trail the stop. The trailing stop can be done using a

variety of methods including a monetary or percentage basis. We choose to

trail the stop by a two-bar low for a really short-term trade and end up getting

out of the other half of the position at 1.2831. Therefore on this trade

we earned 40 pips on the first position and 36 pips on the second position.

The next example is for USD/JPY. In Figure 9.9, we see that USD/JPY

is trading well below its 20-period moving average on a 10-minute chart

and is headed toward the 105 double zero level. This trade is particularly

strong because the 105 level is very important in USD/JPY. Not only is it a

psychologically important level, but it also served as an important support

and resistance level throughout 2004 and into early 2005. The 105 level is

also the 23.6 percent Fibonacci retracement of the May 14, 2004, high and

January 17, 2005, low. All of this provides a strong signal that lots of speculators

may have taken profit orders at that level and that a contra-trend

trade is very likely. As a result, we place our limit order a few pips below

105.00 at 104.95. The trade is triggered and we place our stop at 104.75.

The currency pair hits a low of 104.88 before moving higher. We then sellhalf of our position when the currency pair rallies by double the amountthat we risked at 105.35. The stop on the remaining half of the position isthen moved to breakeven at 104.95. We proceed to trail the stop by a fivebarlow to filter out noise on the shorter time frame. We end up selling theother half of the position at 105.71. As a result on this trade, we earned40 pips on the first position and 76 pips on the second position. The reasonwhy this second trade was more profitable than the one in the first exampleis because the double zero level was also a significant technical level.Making sure that the double zero level is a significant level is a key elementof filtering for good trades. The next example, shown in Figure 9.10,is USD/CAD on a 15-minute chart. The great thing about this trade is that itis a triple zero level rather than just a double zero level. Triple zero levelshold even more significance than double zero levels because of their lessfrequent occurrence. In Figure 9.10, we see that USD/CAD is also tradingwell below its 20-period moving average and heading toward 1.2000. Welook to go long a few pips below the double zero level at 1.1995. We placeour stop 20 pips away at 1.1975. The currency pair hits a low of 1.1980 beforemoving higher. We then sell half of our position when the currencypair rallies by double the amount that we risked at 1.2035. The stop on theremaining half of the position is then moved to breakeven at 1.1995. Weproceed to trail the stop once again by the two-bar low and end up exiting