Breakout trading strategies prove popular with traders for several reasons. Firstly they offer a structured trading method where entry, risk and exit can be easily and clearly defined. Secondly they can be widely used across various different markets and time-frames. Here we look at the Asian session Forex trading strategy which provides a typical example of a simple breakout strategy in action.
This time period is a particularly good candidate for trading this type of range strategy. Historically this time zone has seen a drop in liquidity due to the closure of the main Forex markets in London and New York. As traders in these two markets close up for the day and leave their desks, the volume of transactions drops away.
The Market Theory
The London Forex market hours account for over 40% of the daily traded volume on Forex. The New York Session accounts for nearly another 30%. Such high levels of trading activity naturally see high levels of market volatility. This peaks as these two sessions overlap. The London market enters its afternoon session just as the US markets com online for a peak in daily activity.
The remaining 30% of daily currency transactions occur across the Pacific and Asian sessions. During these time zones trading is generally less frenetic due to the lower volumes. Instead the focus is shifted to regional currency pairs.
Trading in Yen based crosses tends to dominate with over 70% of the daily trading on the USD/ JPY pair taking place over this session. A significant number of deals are also brokered on Australian and New Zealand dollar pairs.
The Asian Zone Strategy
The basic premise of any Asian zone breakout strategy is to capitalise on a slowdown in the movement of the major currency pairs as the largest markets go offline. This happens as a consequence of key European and US financial desks closing out prior to the Asian markets opening. The result is a lower volume of transactions taking place in the market across the Asian trading window.
Trends set prior to the opening of this session are frequently parked at this time. Most European and US dealing desks will have closed by the time these markets open, with most traders preferring to have closed out of their open positions before leaving for the day.
The result of this is that many trends stall, only to be picked up when activity increases the following day. This results in breakouts occurring when traders open their desks the following morning and trends set the previous day resume.
The above example highlights the constricted price action movement over the Asian trading zone. Note the small candles and increased break and volatility that is seen when the main financial markets open.
Trading the Asian Zone
As with any breakout strategy for Forex it is important to wait for a confirmed move as not all breakouts will follow through. This is perhaps the hardest part to deal with.
The Asian session breakout can give false moves. These will catch out the unwary trader so it is best to wait for confirmation of the move before entering in the direction of the break.
Have some rules in place to help prevent handing your money to your Forex broker unnecessarily. Alternatively, trade a strategy that will help you to harness these false moves.
Ideally if you are trading the Asian range then you need to position your stop either at one side of the range of just below the level where you anticipate the break. Keep you risk tight and be prepared to admit that you have got it wrong.
Defining your risk, entry and exit positions can be easily done prior to entering the market. This leaves you with just having to focus on the execution of your orders when the anticipated level is hit.