The strategies below are variations on the general range breakout strategy described previously.
Asian Session Breakout
This forex strategy aims to capture the breakout of the Asian trading session (24:00 - 08:00) during the London, UK trading session (08:00 - 15:00). If the breakout is to the upside, traders take long positions, and if it is to the downside, traders take short positions. Prices don't usually move too much in the Asian session and volumes are lower than during the London / New York sessions.
However, this all changes when the European and UK markets open and the surge in trading activity causes price to breakout of the narrow Asian session range. Looking at the chart below, lets review the simple rules for this strategy:
At 07:00 GMT, draw lines to mark the highest high and lowest low of the Asian session;
Place a buy stop and sell stop order 2 to 3 pips outisde the Asian range;
Stops are placed 2 to 3 pips away from the opposite level e.g. the stop for the buy stop order is 2 to 3 pips below the lower sell level;
Profit targets can be placed either at a fixed number of pips, or a percentage of the Average Daily Range (ADR) or simply trail the stop to ride the trend;
Now you wait for the breakout to occur;
When one of your pending orders is executed, cancel the other. Or if you prefer use OCO (one order cancels the other) orders instead of buy and sell stop orders.
This is also known as the London daybreak strategy or the London breakout strategy. This breakout usually happens within the first three hours into the London session.
The Defining Range Strategy
I have recently begun to follow a trader on YouTube who has developed a twist on the Opening Range Breakout (ORB). His results so far are impressive and his strategy offers an 88% probability of success (allegedly) although no statisitical evidence is provided to support the claim. However, I've used the RSI Histo to confirm price action to avoid losses from trading where the pattern fails - something that Range Breakout strategies often do.
The Defining Range Rules
The strategy is only intended for use during the liquid USA equity trading session from 09:30 - 16:00 EST (or 14:30 - 21:00 GMT).
The assets to be traded are stock or equity indices - S&P500 (SPX), Dow Jones Industrial Average or DOW 30 (DJIA) and the Nasdaq 100 (NDX).
You should NOT trade on days where there is high impat news expected
The Defining Range (DR) is the high - low range for the first hour 09:30 - 10:30
Draw this range on a 5 minute chart which will cover 12 x 5 minute candles
You now know the high of the day or the low of the day with an 88% probability: The New York sesion lasts 6.5 hours and after only one hour, you have 2 important levels. It is not known at this stage which level will be "true" so:
If price CLOSES above the DR, then the DR low is likely to be the low of the day.
If price CLOSES below the DR, then the DR high is likely to be the high of the day.
The Implied Defining Range
There is an inner range called the Implied Defining Range (IDR) which is bounded by the high and the low of the candle BODIES - i.e. no wicks included. The IDR is an early indicator for which of the DR levels is "true". This "true" level can be used confidently as a stop level because it will not be breached with 88% probability.
If the low is confirmed as true, buy the close ABOVE the IDR with a stop at the low of the DR.
If the high is confirmed as true, sell the close below the IDR with a stop at the high of the DR.
In the chart below the DR is marked in grey lines and the IDR levels at the red dotted lines. You can see the the lower DR and IDR levels were broken and a sell trade was executed. However note that shortly after the price retraced to test the lower level oferring a further entry opportunity. There was then a second test of the lower level which also failed and price collapsed. The stop at the DR high was never threatened and was in fact the high of the New York session.
Here is a buy trade example where the upper DR was broken (just!) and trade entry was made after a second pullback of the tes of the upper DR level. But note that the prior DR range marked to the left of the chart failed miserably - not only was the DR broken according to the rules but so was the low. So your buy trade would have got stopped out at the DR low and if you managed a to place a sell trade, you might have recovered some of your loss. This is why I'm skeptical about the 88% claim.
Further trading tips are given:
Look at the price action of the DR open to the DR close - should be 12 x 5 minute candles. If there is a clear trend, then make that your bias for trading. If there is no trend, remain neutral.
If price retraces ( or pullsback) to the IDR level and then reverses, its worth considering an additional trade.
Using Fibonacci retracement and extensions from the IDR low to the IDR high with standard deviation steps of 0.5 creates a set of entry and exits levels for trading. Once price closes above the DR it will hit the first 0.5 Fibonacci target with high probability.
AFter the DR is broken, the IDR high, low and mid-point become valuable levels for entry after a retracement or pullback into the conformed trade direction.
Trading the Overnight Session
As the New York session closes at 16:00 EST, the DR and IDR levels continue to be valid durig the overnight session such that if the DR low is confirmed as the low of the day, then that level will not be broken during the overnight session with 88% probability and price will continue to expand higher.
The Overnight Defining Ranges
The levels for the overnight defining range (ODR) are drawn from 03:00 to 04:00 EST on a 5 minute chart. The overnight implied defining range (OIDR)is drawn as before using the 12 x 5 min candle bodies high and low. You can use thes levels to trade US equity indices throught the European / London sessions until 08:30 EST. ANy breakout in the overnight session should confirm the prior DR and IDR bias.
Concluding thoughts
I like the concept of the range breakout because you allow the market to tip its hand before you take any action. Range breakout trading success is boosted by using other indicators to confirm the breakout and risk management (stops) helps to avoid losses if the pattern fails.
This is the weakness in the strategy - it fails on many occasions but by avoiding high volatility days and trading after a break -pullback-push and close sequence with confirmation from the RSI Histo indicator, the payoff from this strategy is high.
Our favourite tool for confirming price action is the RSI Histo indicator which ensures that price momentum is on the side of your trade. The defining range strategy rules are well defined ( no pun intended!) and it offers multiple opportunities for trade entry compared to the general breakout strategy.
Useful Stuff
Download our custom built Defining Range Indicator HERE
Check out our video section to see this strategy in action
Learn about the RSI Histo Indicator HERE
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