Day trading the Forex Asian session brings with it some unique challenges. It has the reputation of being boring, slow even.
But any market that is open to Chinese news is always prone to surprises.
Like Forest Gump said;
“Asia is like a box of chocolates …” - Forest Gump?
I think that is what he said.
Reading market structure was popularised by technicians such as Charles Dow and W.D. Gann (amongst others).
The stages of price movement is something that should be one of the first things a technical trader learns.
The Asian session brings with it another aspect of structure that is both useful, and semi-predictable in it’s timing. I call it the Sydney hour. Which is silly, since it is two hours, and more to do with Tokyo, but anyway.
The Sydney hour
The Sydney hour is the period between the Sydney open and the Tokyo open. This period has some interesting predictive qualities when it comes to where the real action happens through Asia. The Tokyo session.
The best thing? It is the TV dinner of analysis. Quick, easy and easily resurrected.
A part of the teachings of market structure is the concept of contraction and expansion. The rhythm of the market. As sure as the market inhales, it exhales. The deeper the breath in, the harder the breath out. The same applies here.
Think of the period between Sydney and Tokyo as a time to gauge how hard the market is breathing.
Rhythm of the market and trade types
There are three types of trades I assess when day trading the Asian session:
- The breakout trade
- The retracement trade
- The go and play golf trade
The process of assessing how hard the market is breathing determines the type of trade that is anticipated for the opening of Tokyo.
The market can be doing one of three things:
- Puffing profusely
Let’s look at each separately.
Inhaling, breakout trade
Here is a chart of the AUDUSD 5M chart from Friday 14, September 2012. The period we are looking at is between Sydney open and Tokyo open, marked with the Peach and Blue lines. Quite obviously the market is inhaling as Asia wakes up with slow, quiet activity as we lead into Tokyo.
What it means
Look to the left of the Sydney hour, you can see a rapid rise leading in to the sustained period of rest as the US session closed and Sydney opened. The market is taking a deep breath in, recovering after a busy time. But of course, you can’t take a breath in forever, at some point you need to exhale. Queue Tokyo.
How to trade it
- Near Tokyo open, mark the high and low of the quiet period.
- Determine trend (either with Moving Averages or my simple two line method).
- Open a position in the direction of the trend on the first close beyond the marked range.
- Place a stop below the breakout bar. It will either go or it won’t, this way you maintain profitable risk/reward ratios.
- Wait for one retracement after the breakout, and close the trade on the next push.
Exhaling, retracement trade
In this chart of the AUDUSD 5M chart from Monday 17, September 2012 the picture is quite different. Here we have had a controlled move down from highs through the US session.
The key here is it’s controlled appearance, with proportional moves down and controlled retracements.
What it means
Think of this market as the morning jogger, out for a refreshing run in the fresh morning air. They run controlled, not pushing too hard, but working up a sweat. We don’t want to join a move that is pushing too hard, burning itself out before we join.
Asia quite often joins the party late on these moves, so we want to see that there is some energy left. This will usually happen with an evenly paced move. Like our controlled morning jogger, breathing controlled breaths, in, out, in, out … you get the idea.
How to trade it
We want to join this move on the next exhale. I think of a retracement as the jogger inhaling that fresh air, and the next move with the trend as the exhale.
- Near Tokyo, determine the trend, which in this case should be easy. If it is not, this may not be the type of trade you are thinking it is.
- Draw a retracement area of the last move. The area should be from the 33% to the 66% retracement, almost all retracements worth trading turn in that area.
- Wait for a reversal bar in the direction of the trend within that retracement zone and jump on board.
- Stop above the last pivot, which may be formed by the reversal bar itself.
- Trade a break of the previous low for a short trade and jump out on the first signs of weakness.
Puffing, play golf trade
This is the easiest, yet hardest, trade of all. It fills that paradox because despite you doing the analysis, it requires you to stand aside and do nothing. It is probably the most important trade you will take all week.
What it means
Above is the AUDUSD 5M chart from Monday 10 September, 2012. Here you can see the action through late US and the Sydney hour is has no clear pattern. This is different than the inhale pattern, where nothing is happening.
There is plenty happening here, but it has no clear direction. It is like my 6 year old after a bag full of lollies and a bottle of Coke. Doing plenty, bouncing off walls, with no clear direction.
How to trade it
These are the dangerous Asian sessions. Erratic movement into Tokyo like this usually means two things:
- The market exhausts and does bugger all for the rest of the day.
- The wild action gets crazier, like it did in the chart above and your trend trades turn into chop trades.
For me, as an intra-day trend trader, this is bad news. These are the days it is best to head to the golf course and hack your way around the fairway, than stay at home and hack your account balance.
Day trading the Asian session has got a bad wrap over the years, but it need not be your enemy. You can use it to your advantage by taking the extra time a slower moving market provides to make a balanced decision based on analysis like the above.
Trade your way, but this is part of mine.