Sunday, June 22, 2008

Asian Break Out Strategy 5

Over the last few months I have had numerous letters like the one below.

Hello Graham,

I've read your posts about the Asian Breakout Strategy and I wanted to thank you for sharing this strategy and all the data of your trades.

I was just wondering if you still applying that strategy with similar results? If so, what do you do when the price already break the range at 8:00 GMT?

What is your discretionary exit strategy?

Have you made any updates to this strategy?

Thanks for sharing your thoughts and knowledge all your posts and articles are helping me a lot!

Best Regards,

Click Charts to enlarge

The two main questions I have had over the months from many traders are!
What do I do when the breakout occurs during the period between the Frankfurt and London opening ?

What do I do when the breakout misses the target and retraces?

Over the months I have worked on refining the system somewhat in order to avoid the false breaks. I imagine there are numerous indicators available that can act as a filter to ensure we only trade the correct breakout and ignore the false one.

Obviously no system is infallible but these few simple indicators have certainly helped a great deal with improving the profitability of the system.

I have added a 120 period ema (red) that acts as my long term trend indicator, a 5 ema (black) and a 21 ema (blue) as well as a standard 12,26,9 MACD line indicator.

The above eur/jpy charts are 1 hr and 15 min. We can see the market was clearly long at the time of the breakout on the 1 hr chart. Price was above the 120 ema and the 21/5 ema cross was also long. The MACD had also signalled a long. My obvious choice was therefore also to watch for and trade the breakout long. The 15 min indicators confirmed my thinking.

Shortly after entering the market retraced slightly and bounced at the 120 ema and then carried on long without threatening my stop.

The entry for the trade was at 167.58 with my stop 40 pips below at 167.18 and profit target 168.18. As we can see price only went as high as 168.11 then retraced. 168.11 was also at a previous high in the market and therefore alerted us to the fact that it was possibly the end of the run.

Whilst I don't recommend a 15 pip trailing stop at the entry point as this would inevitably close out the trade on any small retracement, once it was 50 pips up and at resistance then a trailing stop would ensure closing out the trade with the bulk of the profit in tact. Alternatively we could have closed out when the ema's and MACD crossed short at 167.84.

There is no doubt that simple indicators can improve the results and filter out the false breaks.
If therefore the breakout occurs prior to the London opening in the direction of my long term indicators on the 1 hr chart then I will take the trade, If it is in the opposite direction then I will ignore it and assume it is only a retracement.

The same strategy applies to the breakout of the London opening, I will only trade the breakout in the direction of the indicators. If the 1hr and 15min indicators disagree then I will wait till they are in sync before entering the trade.

The Pivot Point can also be a useful indicator as price often heads to the PP then continues.

  • Establish the overnight Range
  • Confirm the trend on 1hr using a long term trend indicator like a 120 period ema
  • When 15 min indicators concur then trade breakout in direction of 120 ema
  • If 1hr and 15 minute do not concur exercise patience until they do.
  • If target is not realised then add a trailing stop at support or resistance or close out when indicators turn