Initial Balance Strategy (tested on EUR/USD)
So, guys I came across the initial balance strategy developed by J. Peter Steidlemayer in the 1980s. He was a member of the Chicago Board of Trades and is a trading veteran.
What the initial balance strategy basically says is that the initial opening hour of a trading session should be paid attention to as it can define what the rest of the session will look like.
I researched into how to use initial balance strategy for EUR/USD trading and I made some adjustments that I will share with you. Instead of paying attention to the 8 am - 9 am first hour of the London session, I decided to pay attention to the 6 am - 7 am Frankfurt open that comes before the Londin session because I found it relates more to the EUR/USD pair.
Please feel free to add your thoughts on this because I am only going to be discussing what I have tried and found out about the initial balance strategy when testing on EUR/USD
The first step in using this initial balance strategy is to mark out (on your chart) the lowest and highest price reached between 6 am and 7 am UTC time.
The purple lines indicate the highest and lowest price reached between 6 am and 6:55 am UTC time. So, i simply use the purple lines to mark out the upper and lower range between 6 am and 6:55 am also known as the Pre-Frankfurt hour.
The yellow rectangle is what I used to mark out the Asian trading session from midnight to 5:55 am UTC time.
The Pre-frankfurt hour range (6 am - 6:55am) is our initial balance and is marked by the purple lines. Notice how price broke out of the Pre-franky low (lower purple line) and reversed upward commencing an upward trend.
After price closed outside/below the lower purple line and you spotted the bullish engulfing reversal pattern, it would have been a buy signal for you to go long.
The initial balance strategy can also be used to determine the direction of the New York session.
I siimply draw a box to mark the range of the 12 pm to 1 pm hour then wait for price to breakout of the range. If the breakout results in a reversal, then i trade the direction of the reversal.
In the attached image they were two breakouts at the upper and lower edges of the blue box and a reversal followed suit.
It works pretty well. Basically you attempt to use the initial balance of the 12-1pm hour to pick an entry. We just wait for price to breakout and come back into the range and that serves as our entry trigger.
Every market opens with an auction which is basically a way for the market participants to determine the highest/lowest prices traders are willing to pay and it always leaves a foot print behind - called the initial balance. I am not sure how it applies to currencies (it may be modified for fx trading) but I know for sure it works in the stoock futures market.
