Tuesday, May 13, 2008

Asian Breakout Forex Strategy

The strategy I'm currently using to trade Forex is a breakout strategy based on the Asian trading session. Trading session times. Basically, the theory behind this strategy is that the forex market tends to be relatively quiet during this session compared to the London and New York sessions, which have higher volatility. Thus, when the London session opens (or soon thereafter), it tends to breakout one way or the other from the range of the Asian session. A trader can set a trade to enter the market on the breakout, and then just set levels of take profit and stop loss. I can't be at my computer during most of the day to trade, and I don't have a ton of time to devote to watching trades, so this kind of set-it-and-forget-it breakout system is ideal for me. From what I can tell, this strategy has been around for a while, and its success is well documented. The most popular pair to trade with this system is the cable (GBP/USD), but other pairs have been successful as well. There are many variations of this system out there--the rest of this post will focus on how I'm currently trading it. If interested, there's plenty of background info on the system here, here, and here.

Currently, I'm trading four pairs, right now all with the same rules (Note: this post is just going to describe my current strategy. I already have some ideas for altering it, so make sure to check future posts). The pairs that I'm trading are GBP/USD, USD/JPY, EUR/JPY, and GBP/JPY. Four pairs is generally a lot to trade at one time, but given the breakout system, it's a bit easier to track than if I was day trading each one, and I still feel that I'm learning the characteristics of each pair. When I go live, I'll make the decision whether or not to still trade all four based on their performance that I'll be posting on this blog.

Here's how I'm doing it:

  1. Find the high and low between 18:00 and 01:00 EST (23:00 to 6:00 GMT).
  2. Place a buy stop order 4 pips above the high, and a sell stop 4 pips below the low.
  3. Place a take profit of 45 pips, and a stop loss of 30 pips for each order.
  4. Remove any orders that have not executed by 16:00 EST (21:00 GMT).
Here's an example of a trade from last week (click for a bigger view):

I only put the "Buy" setup on the image...you would have a similar "Sell" setup as well. So, you can see the two vertical yellow lines marking where I look for the high and the low (sorry if the times are confusing...my broker uses GMT -1). The Buy stop is placed 4 pips above the high, the take profit 45 pips up from that, and the stop loss 30 pips down from that. As you can see, this trade executed on a bullish breakout that continued straight up to my take profit.

That's the basic strategy...pretty simple, but many people have used it to be profitable. Watch for later posts for more detail or revisions on my version of the strategy and a summary of how it's working so far.

No comments: