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!

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.

The Forex Initiative

I am starting this blog as a forex trading journal to keep track of my trades, strategy, and insight into the forex market. I am relatively new to Forex, and thus hope that this blog will serve not only to make me more disciplined in tracking and managing my trades, but also will serve to educate those who are also new to the market. For those of you who may also be new to Forex, and who would like some background information, you can find that here. My goals for this blog are as follows:

1. Post my trades and profit/loss from those trades at least on a weekly basis. I will post this in both pips and dollar amount. Currently, I am trading on a demo account as I hone my strategy, but I plan to go live within the next few months. Once I do, my posts will track my account size with the real dollar amount. More on this in later posts.

2. Create on the site various resources for Forex traders. I plan to start by discussing my current strategy, which is a breakout strategy, and refine my rules for it as I find what works and complete backtesting. I also hope to review other strategies out there and add them to the site. As I gain experience with different Forex platforms and brokers, I will also add my experience with that here as well.

3. Remain systematic with my methods and honest with my reviews. Forex can be a cutthroat market, and this means that to make money, you must be incredibly diligent with trading and stick to whatever method you choose. Such a market has also created plenty of opportunists, and there are scams out there in the form of brokers and trading systems. Sometimes, it can be hard to sort the good information from the bad. I will strive to maintain this site as objectively as possible, so you know you're getting reliable information.

More posts to come soon. As I said, once we get rolling I'll be shooting for at least a weekly review of trading. For now, the first couple posts are likely going to be some background info with a focus on my current trading strategy. Stay tuned.