...Back Trading the Asian Breakout

My apologies to those of you who have been checking this blog to see how the updated strategy was doing. I was out of town and out of the country for much of the summer, and didn't have much time to devote to trading. However, I'm back now and should be back up and running how I'd like to be within a week or two. For now, the good news is that I've been trading the strategy revisions I outlined in my last post for the last two weeks, and it's been going well. Since September 15th, the strategy is up 255 pips.

Feel free to check out the Daily Trades Spreadsheet to see how things are going by pair. I haven't been making much commentary on these as of right now, but all the trades and results are recorded. Stay tuned as I will be planning to devote a bit of time to discuss risk management strategy soon as I continue to test the new trading strategy. If all continues to go well, I'm looking to open a live account within the next month or two.

Trading Results, 5/26 - 5/30 and Breakout Strategy Revision

Here are my forex trading results from this week:

Week 5 (5/26 to 5/30): -59 pips

Results by pair for the week: GBP/USD down 55 pips, USD/JPY down 32 pips, EUR/JPY up 56 pips, GBP/JPY down 28 pips.

I didn't record the total pips to date in this week's post because I'm working on changes to the basic strategy, as I talked about in last week's post. This week, I didn't follow a set strategy, but rather went on my gut based on support and resistance levels. I didn't do great, but I did beat what the basic strategy would have produced by 220 pips (the basic strategy, which works fine in most market conditions, was down 279 pips this week, as the forex markets continue to fight several tough technical levels). Most importantly, upon reviewing this week's trades, I was able to make what I think will be some good edits to the basic strategy that should make it more profitable in all market conditions (make sure to see the details below).

Analysis:

1. One quick thing to note is the effect that Memorial Day had on market volatility. It was down across the board, but was virtually quiet in the US session, which makes profitability on a breakout strategy awful tough. I had to close out a record 3 trades manually (i.e. they didn't hit SL or TP by 4pm EST). Had I not traded at all, I would have been profitable for the week. So, next year, I think I'll take Memorial Day off with the rest of the traders.

2. I'm only going to include one chart this week just to reinforce the points I made last week about the importance of support and resistance levels in the forex market.


The above chart is from the GBP/USD from Tuesday. The set-up period is in between the yellow bars. When I looked at this, I saw that the pair didn't have much room to the resistance above, but did have some room before hitting the below support. Thus, I only placed the sell entry order, and not the buy. As you can see, that paid off, as the pair started up, but reversed when it began getting close to resistance. It then had a good run down and made it to my TP with no trouble.

Strategy revisions:

OK, here are the proposed revisions to the basic asian breakout strategy. On a quick back test (past two weeks), it looks good. On the four pairs I'm trading, it produced less overall trades, but was much more profitable. This past week, the following would have produced 7 wins and 5 losses for a gain of 150 pips. Two weeks ago, it would have produced 6 wins and 1 loss for a gain of 220 pips.

Here are the changes:

1. ONLY trade WITHIN the current support and resistance channel
(i.e. whatever S/R lines the candles are in between at the time of set-up is where you consider trading. If the bars have not broken above resistance or below support during the set-up period (22:00 to 5:00 GMT), the TP level for a buy or a sell must be within that channel. If the candles have broken resistance or support, however, then you can place your entry and TP based on the next channel)

2. If the market is in a clear TREND (defined as trending on both the 4-hr and 1-hr charts), ONLY trade IN THE DIRECTION OF THE TREND. If it's not trending, trade either way.

3. Set Take Profit and Stop Loss based on the following for pairs GBP/USD, EUR/JPY, and
USD/JPY:

1. If there is less than 40 pips room from entry to the nearest support or resistance line--> NO TRADE
2. If 40-59 pips from entry to the nearest S/R line --> set Take Profit/Stop Loss at 30/20.
3. If 60+ pips from entry to the nearest S/R line --> set TP/SL at 45/30.
4. If 3 or more candles on the 1-hr chart are touching a line of support or resistance, set TP/SL levels at 30/20 regardless of distance from the nearest S/L line.

4. For GBP/JPY, follow these rules:

1. If there is less than 60 pips room from entry to the nearest S/L line --> NO TRADE
2. If 61-79 pips from entry to the nearest S/R line --> set TP/SL at 45/30.
3. If 80+ pips from entry to the nearest S/R line --> set TP/SL at 60/40.
4. If 3 or more candles on the 1-hr chart are touching a line of support or resistance, NO TRADE.

This is how I will be trading this week. Hopefully it will continue the results it produced during the backtest.

Here's a couple of other things on my mind that I'm thinking about incorporating into the strategy:

1. Using Fibonacci Levels and/or Pivots to supplement support and resistance.

2. Money management such that each trade would represent the same percentage win/loss of account size...i.e. change the lot size based on the number of pips of your TP/SL so that your TP/SL always represents 3%/2% of your total account size.

That's it for this week. Check back next weekend to see how this strategy is doing. In the meantime, remember you can get brief updates by looking at my Daily Trades Spreadsheet.

Trading Results, 5/19 - 5/23

Here are my forex trading results from this week:

Week 4 (5/19 to 5/23): -127 pips

Total to date: -292 pips

Results by pair for the week: GBP/USD down 127 pips, USD/JPY down 30 pips, EUR/JPY up 90 pips, GBP/JPY down 60 pips.

Analysis:

While it was a down week, it certainly reinforced the points that I made after reviewing the trades from last week. There, I noted how much support and resistance levels were affecting the market, and that my basic strategy wasn't working as well because nearly all of the charts of the pairs I'm trading had moved into areas with a lot of crossing support and resistance lines. My trades were bouncing off these lines left and right, and as I wasn't looking for it, I lost a lot of them.

This week, I decided not to change my basic strategy just yet, and to monitor the support and resistance lines to see if it would explain why my trades performed the way that they did.

Well, it did--surprisingly well, actually. Upon my review of my trades for the week, I only found one or two examples of trades that failed for a reason other than bouncing off of a support and resistance line. Monday, for example, was my worst day ever, down 180 pips, and I shouldn't have set up 7 out of the 8 trades I set up based on S/R levels. By the end of the week (Thursday and Friday), most of the pairs were moving out of the channel they went into early last week (i.e. less S and R lines around), and I was up 57 pips over those two days using just the basic strategy.

You can see a brief summary of all of my daily trades on my Daily Trades Spreadsheet. For this post, I'm going to run through an example of what I'm talking about above, going day by day using EUR/JPY as an example.

First, here's a 4-hour chart of how EUR/JPY looked coming into the week (the support and resistance lines were drawn from the daily chart...the light blue one is the strongest as it had been tested multiple times on both sides).


Now, the trades:

Monday 5/19:


From the high and low of the 22:00 to 5:00 session (indicated between the yellow lines), the price only had less than 30 pips to move up before hitting resistance and less than 20 pips to move down to before hitting support, respectively. As you can see, price brokedown (at the white down arrow sign), came within a few pips of support, and turned around, making it back up to hit my stop loss (at the white thumbs-down sign). Down 30 pips on the day.

Tuesday 5/20:


Here, you can see the sell order should never have been placed, as the price was just about to the blue support line. It was tripped, the price turned around, and it hit my stop loss. The buy order, however, was correctly placed, as there was about 60 pips room up, and it hit the TP, as you can see. Up 15 pips on the day.

Wednesday 5/21:


As you can see, almost an exact repeat of the day before. Only the buy order should have been placed. Up 15 pips on the day.

Thursday 5/22:


Here we got lucky. The buy order was placed, though it shouldn't have been, and it did win, as price action broke through resistance. Note how long it took for it to finally break through though. The stop order was within a few pips of being tripped. A safer alternative to that trade would have been to place the buy entry a couple pips above the previous day's near double high of 163.14. This would have avoided the resistance line (and we would have been protected if price reversed), yet it still would have been more than sufficient to net us a TP of 45 pips. Up 45 pips on the day.

Friday 5/23:


Both buy and sell orders would have been fine to place, as there wasn't any resistance or support within 70 pips. As you can see, just the sell side was activated, and the price moved down nicely to activate the TP before hitting the support below. Up 45 pips on the day.

So, all of the above traded with the basic strategy put the EUR/JPY up 90 pips on the week. But, as you can see from the examples above, a little attention to support and resistance levels could have easily made that up 180 pips, doubling the profits for the week.

As I said before, EUR/JPY was just an example. Every pair would have benefited from this strategy...see my comments on my Daily Trades Spreadsheet to get an idea how.

So, how does this change the overall strategy?

Well, while I'm becoming quite convinced that respect for support and resistance levels must become a part of my final strategy, I'm not sure exactly how I'm going to implement it. This is because I'd like to come as close to a rule-based, mechanized system as possible. That makes it easier to back-test, easier to analyze, and most importantly, easier to implement. Nonetheless, this week, I'm going to deviate a bit from the basic strategy to place trades based more like what I talk about in this article. I'll still be keeping a keen eye on the performance of each trade and will report on the progress next week. In the interim, feel free to get brief updates in my comments on the spreadsheet.

Trading Results, 5/12 - 5/16

Well, I got pretty much crushed this week. Here's the results:

Week 3 (Mon 5/12 - Fri 5/16): -285 pips

Total to date: -165 pips

I may have spoken too soon on the cable, as GBP/USD was the heartbreaker this week, down 225 pips with four days in a row of losing on both buy and sell orders. The USD/JPY was up 15 pips on the week, the EUR/JPY down 15 pips, and the GBP/JPY down 60 pips.

Analysis:

1. It was a disappointing week of trading, but not without a few lessons. Upon reviewing the charts, it seems that several of the pairs saw the EMA 14 and EMA 55 tighten up on multiple time frames, and support and resistance became key players.

2. Trading GBP/JPY with take profit at 90 pips and stop loss at 60 as I considered last week would have resulted in a loss of 30 pips instead of 60. It's worth noting, however, that I think what I mentioned in #1 above had an effect on this.

I'm going to go into a lot more detail about what I noticed on #1 and how it might affect my trading in a follow-up post. I'll be looking at the EMAs I mentioned and discussing support and resistance, and will post some examples from this week's charts.

Forex Breakout Strategy Results

I started trading the strategy I described in my previous post on April 30, so I've been at it for about two weeks. I've been trying to keep close track of what's working and what's not. First, the results:

Week 1 (only Wednesday - Friday): +180 pips

Week 2 (Mon 5/4 - Fri 5/9): -60 pips

By pair, GBP/USD is performing the best, up 135 pips with only one overall losing day out of 8 trading days. Next in line is EUR/JPY, then USD/JPY, which have been profitable by 45 and 15 pips, respectively. GBP/JPY, the worst performer so far, is in the red 60 pips as of 5/9.

Analysis:

As I look over my trades from the first 8 days, two things are catching my eye that might work their way into rule changes.

1. First and foremost, GBP/JPY is by far the most volatile of the pairs I'm trading, and as such, my take profit and stop loss levels may be too small. Basically, my stops are getting hit on reversals, when it would have turned around in my favor. As the price motion seems to be sufficient, I backtested GBP/JPY with a take profit of 90 pips and a stop loss of 60 pips over the week. This maintains the risk:reward ratio I'm trading on the other pairs, but allows for greater price fluctuation. The results were impressive. Trading at TP:SL of 45:30, GBP/JPY was down 105 pips on the week. With 90:60, it would have been up 150 pips. That's a swing of 255 pips in one week. If that's consistent, it could have a huge effect on my bottom line.

2. This one doesn't have as much data to support it as does the one above, but this week, when EUR/JPY or USD/JPY were trending downward in the Asian session, they appeared to continue that trend into the London session. However, it seems that they were retracing harder with this behavior than with a typical breakout and hitting my stop losses. Here's an example:

As you can see, my entry was picked up, only to reverse to my stop loss, only to reverse again and continue the trend. As I said, the data is limited here, but I'll be watching for more setups like this. If it holds, I'm thinking about moving my risk:reward to 1:1 on these trades, i.e. 45 pips take profit and 45 pips stop loss. On the chart above, I have "Alternative Stop Loss" in orange marked at 45 pips. As you can see, the trade would have been profitable with that setup.

As of now, I've made no rule changes, as I want to make sure that I get enough data to support my changes. I'll post my results for this week and analysis this weekend. Soon, I'm hoping to get a spreadsheet linked from the blog so you guys can see more detail from my trades. Within the next few weeks, once I start settling in on my rules, I'm going to try to start doing some backtesting too, to see how the rules would have fared trading in earlier months. Happy trading!