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In Play Index (IPI) - How to tell if you should be day trading a Forex pair

If you are going to day trade the Asian session as I do, you need to get an idea on whether a Forex pair has enough volatility in it to make your efforts worthwhile.

This can be a scenario unique to the Asian session as there are periods of low liquidity, or conversely, larger spreads. The In Pay Index (IPI) aims at providing a quick and easy way to determine which pairs are “in play” to trade at a moment in time.

The IPI was updated to display in a format others preferred. After you read what is is all about, you can download it here. Else get the original version below.

The enemy to the Asian day trader is a low volatility pair with a large spread. Trading the USDCHF for example makes no sense in Asia as the spreads are around 3 pips, yet you are lucky to see impulses above 10-12 pips intraday. Considering you pay the spread both ways, that means you only have around 5 pips of meat left on the bone.

A way around this is to compare a pairs spread to it’s average range on an intraday time frame. The IPI does this by dividing the spread by the average of the highs minus the average of the lows over a determined period to give us a ratio we can compare between pairs.

For example, at the time of writing (half way through the Asian session), here are the IPI readings for all the major pairs (lower the value the better):

  • AUDUSD – 0.22
  • EURUSD – 0.29
  • GBPUSD – 0.56
  • USDCHF – 0.93
  • USDJPY – 0.21
  • USDCAD – 0.90

These IPI readings come from comparing the spread to the average range (different to the ATR) of the 5M charts, for the past 24 periods. The lower reading the better, as this says the spread is a smaller component of the average range for the pair. In other words, there is more potential profits available after paying the cost of the spread.

You can see at a glance that day trading the USDCHF, USDCAD or GBPUSD in Asia at the moment makes no sense when you can get substantially more of the move on the AUDUSD, EURUSD and the USDJPY. I personally won’t day trade a pair with an IPI above 0.40 through Asia.

The other scenario that can increase the IPI value is when spreads widen. So while the range might be decent, when the spread is large, it reduces the profit potential of a move. This quite often happens early in the Australian session until Tokyo opens.

IPI = spread / (average of highs – average of lows over a period of time)

There is nothing terribly ground breaking about the method, and my 6 year old would have a chance of figuring out the math, but it is effective, and lets you know at a glance which pairs to trade at a particular point in time.

Credit must go to Steve and Mike over at SMB Capital (@smbcapital) who use a much more complex concept to determine stocks that are “in play” at the prop desk. The name, and the idea drew from those ideas, just dumbed down to my intelligence level.

For Metatrader 4 users, I have put together a simple indicator to calculate this for you and display it in the top left for the major pairs:

It is free to download below, but please provide credit back to this site should you want to share it around.

Download the In Play Index (IPI) indicator