Sunday, January 6, 2008

Asian Breakout Strategy

My Day Trading diary for 2008.

I suppose the holiday season is a time to reflect on the years trading activities. I decided to take a bit of a break and only do an early trade each day with the opening of the European Market. The results were pretty good and required very little effort from my side.

I have always taken a discretionary (personal view or judgment) approach to trading, doing my daily analysis, then waiting for the right setup before entering the market. That does not mean I do not have a trading plan, I believe a trading plan, no matter how simple or complicated is vital for any trader wanting to succeed in any market.

Having said that I suppose my methodology is a combination of discretionary, mechanical and fundamental trading. Discretionary in that I wait for the correct setup to occur using mechanical means, Laguerre RSI, Fibonacci, Macd, and stochastic and then if it fits my fundamental view of the direction I think the market should be taking I will do the trade.

Many times my preconceived fundamental view or big picture is wrong and I get my but kicked. This preconception of where I believe the market should be going has resulted in staying in the market for extended periods of time resulting in a disproportionate amount of overnight Interest paid. $35,000 for the year. I have always thought of myself as an intraday trader and most of my trades are opened and closed daily. Though the interest charges for the year only amounted to about 6% of the profits made, I can't help thinking I would be better off with that interest in my back pocket.

On closer examination of the longer trades I found that very few resulted in profits and generally kicked me out on stop loss along with the added interest burden. Now I know that "HOPE" is not a plan and "HINDSIGHT" is an exact science so I am not going to beat myself up over it. I am however going to try and close my positions specially the (losing ones) by the days end.

A few months ago I received a trading article in my inbox, relating to Leverage and decided to browse the authors website (Dr.Forex) The author of "Bird Watching in Lion Country". I read the book a few years ago and found his methods controversial to say the least. None the less very informative and I hate to say it a "must read" for every aspirant or even experienced trader.

As it was borrowed material when I read it I cannot quote from it or use it as a reference source because I returned it shortly after reading it. My browsing though led me to a statement he made on trading indicators where he states that the only trading indicator he uses is what he calls the "Asian follow through Indicator" This peaked my curiosity but I could find no other information on how to implement it.

Trading is an ongoing learning experience and I embarked on a quest to find out more about the indicator. The Author of the book is a highly reputed trader with a solid track record, who, by his own admission does not use indicators for trading. I therefore figured that this would be a method rather than an indicator like a stochastic, or MACD.

After spending hours examining charts relating to all the JPY pairings I was none the wiser and so decided to look at the major pairs as well. My only conclusion at the end of this exercise was that generally the overall market movement during the Asian session was less than the market movement during the European session and for me not the best time to trade.

I then started to isolate the Asian session on my charts by colouring it in each day between the close of the US market and the open of the European Market. This gave me a clear picture of the overnight range on the majors.

The picture that emerged was that the greater movement during the European session generally pushed price beyond the highs and lows of the Asian session generally in the direction of the overall trend but not always.

If we look at the above 1 Hr chart of GBP/USD the yellow shaded area represents the overnight range of the Asian session. The red line shows price first broke above the yellow shaded area, failed to reach the 50 pip profit target, and resulted in a 40 pip loss.

Price then broke out below the bottom of the yellow shaded area and continued short for 230 pips allowing the recovery of the loss and a handsome profit to boot.

If we look at the other indicators on the chart we can see that price crossed below the Laguerre filter line, the fast Lag, slow lag MACD, and stochastic all conformed the move.

With a bit of back testing I found this could be a good entry for a Break out trade above or the below the overnight range. I then concentrated on the GBP/USD pair because of its greater market movement. After a few dummy runs I decided to do a live trade on gbp/usd. Murphy's law states "anything that can go wrong will go wrong"

The European Session opened in the middle of the overnight range on the gbp/usd pair so I placed a buy order above the overnight high and a sell order below the overnight low. As with every good trading strategy I placed a 50 pip stop loss and a 50 pip profit limit on each entry. As the pair had been ranging for a few days I figured a 1:1 risk reward ratio would suffice for the day.

My short order was picked up shortly after Europe opened and ran about 30 pips my way. I assumed when London opened it would run the extra 20 pips and close me out on a 50 pip profit. However when London opened price immediately reversed and closed me out 50 pips in the red. The buy order was then picked up and ran 37 pips my way, I again I assumed I would at least close out square for the 2 trades. A cable news announcement then caused price to suddenly reverse and I was closed out 50 pips in the red, "double whammy" and not a good way to start my trading day or a new strategy.

Back to the drawing board, maybe I was greedy, as the losses were totally unnecessary. I could have locked in a few pips profit on both positions or at least locked in at break even. The system was not at fault I was. The following day I placed the same orders and my sell order was picked up shortly after the London opening and closed within 20 minutes for a 50 pip profit, cable continued to run another 120 pips for the rest of the day, I had left a substantial amount of profit on the table.

Over the next week I made my 50 pips a day on cable and on one day had a double entry long and short for a bonus 50 pips. It was time to test the strategy on the other majors. I placed 8 orders 4 buy and 4 sell on the major pairs over the next week with varied success, specially on the Euro as it seemed to plod along some days and fly others.

None the less the week closed with only 2 losses which I limited to 30 pips on each of those trades, 1 one on Eur/USD and one on Usd/Chf. The cable pair still remained the most difficult because of its large swings and sometimes closed me out at break even or a few pips profit but I did manage to avoid the fiasco of day 1.

Over the last few weeks I have expanded the system to 6 pairs by adding the Eur/Jpy and Gbp/Jpy placing 12 orders a day at the open of the euro session. No system is infallible and losses do occur, but overall the system is extremely profitable and well worth the few minutes a day it takes to do the analysis and place the orders. The Eur/jpy is the most consistently profitable pair and so far has produced 20 winning trades in a row.

The above 4 hr chart shows the entries and exits for the past 14 trading days. 1 with 1 outright loss and 2 BE days and a number of days with double entries long and short.

No this is not one of those "Eureka" moments as I have no doubt that other traders have probably traded this method long before I did. I cannot even be certain that that this was the original intention of author who's article I read. I also cannot give the Author credit for the method as I had to figure it out myself. What I am certain of though is it works well. If you do not have the time to spend hours monitoring the market then the Eur/Jpy can be an Ideal 5 min a day trade.

For lack of another name I will refer to it as my "Asian Breakout System"

I have tried to find a way of reducing my stop loss but the previous high is sometimes higher than my intended stop of 50 pips or too close to the entry point. So I have just accepted it as a 1:1 risk reward ratio. I do use the Laguerre filter line on the chart and if price reverses and breaks above or below the filter line I will close out regardless of whether or not the profit or stop loss target has been reached. Once the trade is up 20 pips I lock in at BE + 1 and when it is up 30 pips I lock in 10 pips.

On Eur/Usd, USD/Chf and Usd/Jpy I look for 30 pips per trade with a 30 pip stop. Cable, and Gbp/Jpy 50 Pips profit with a standard 40 pips stop. Eur/Jpy 60 pips or I let the latter run for the day with a Standard 40 pip stop.

I have deliberately kept all indicators out of the strategy to keep it simple, It is a breakout trade and must either break the overnight level or it is a no trade. Using other indicators will only confuse things. I enter the trades on the buys spread &1 and on the sells 2 pips below support. This you can adjust to suit yourself.

If one order is executed I leave the other until about 11 am est then cancel it if it is not picked up by then as the US afternoon session is definitely quieter than the morning session.

This 1 hr GBP/USD chart shows Fridays trades using the Asian breakout system The first short trade yielded 30 pips which I closed out with a 10 pip profit as it never ran the required 50 pips. The second long trade yielded the fifty pip profit prior to the Non farm payrolls announcement. I did not trade this pair again during non farm.

This chart shows Fridays trade that was only executed during the news. After the initial run down there was large pull back just missing my stop by 5 or 6 pips before price dropped again and closed out for a 60 pip profit. You will notice the large overnight move on this pair of 112 pips (yellow shading). I have found that when there is a large overnight move 90 pips plus this system is less likely to achieve its target based on this entry method, so maybe a smaller target would be prudent or don't do the trade.

Of the 12 orders placed 2 were not executed, the balance yielded 450 pips on the day. Though I have other indicators on the charts I do not allow them to influence the entry point for the trades. I might use them to to stay in the trade past my preset target but not often.

This is a completely new method of trading for me that has so far has proved extremely profitable. It is still early days yet and only time will tell how consistent it will be.

1 comment:

Jerome said...

This is a great strategy and has been the most consistent winner in my bag of strategies. My only addition would be to place the stop loss 10 pips beyond the pivot point when placing the limit orders. It's well known that the price 95% of the time will retrace back to the pivot point at market open so allowing enough spread to cover this move has decreased my instances of being stopped out. This strategy is a true winner!