This featured article comes from one of my trading buddies, and is a proven strategy we have been using and testing for years!
Isn’t the Asia session very slow?
If you’re a regular London or New York session Forex trader, you probably find the Asia session slow and a bit boring. Maybe because it is a bit slow and boring by comparison to the others, but that doesn’t mean there are no good strategies to make profit during the Asia session.
This strategy comes from my archives. There was a time in my life that I was a moderator of an Asia Session trading room. I did that for a couple of years actually. We had a lot of down time, interspersed with periods of frantic activity. During the downtime, we dreamed up strategies that would make the Asia session more profitable. This strategy came from those brainstorms. We call it the Asia Mirror and if the Asia session is the only time you can trade, this is a good strategy to use. We use this strategy on any pair that includes one of the Asia session currencies (Japanese Yen, Australian Dollar, New Zealand Dollar) which will give you quite a few pairs to look at every day.
Why is it called the Asia Mirror?
The name springs from the fact that we anticipate the Asia session to mirror the prior day’s activity and give us an opportunity to enter positions in the direction of the prior day’s activity. We hope to catch the prior day’s price action retracing so we are positioned to take profit during the London and New York sessions if they follow through on the prior day’s direction.
The Asia Mirror Setup
**Please note that I will be using a past example to illustrate the setup. It is not because I wanted to find a winning trade and make you believe the strategy wins every time–It’s simply much, much easier to explain the process when you can see all of the price action involved.
Sometime after 5PM New York time, open an hourly chart and draw vertical lines at 5PM today and 5PM yesterday. We are interested in the price action between these two lines. Next, draw horizontal lines at yesterday’s 5PM open and today’s 5PM close. And determine what direction the market went for the day. The distance between these lines must be at least 20 pips. If not, we can’t say the prior day had a definitive direction, so we stand aside on this particular pair for the day. The reason we don’t use a daily chart for this is because some broker’s don’t start and end their day at 5PM New York time. However, if your broker does use a 5PM New York time daily close, you can use the daily candle to do your measurement.
The next step is to pull a Fibonacci Retracement tool from the high of the day to the low of the day or the low to the high of the day in the direction in which trading proceeded for the day.
For example, if the day started higher and dropped, pull the Fibonacci to from the high of the day to the low of the day. Conversely, if the day started lower and ended higher, pull the Fibonacci from the low of the day to the high of the day. We are now set up to take advantage of the Asia session retracement.
Lastly, place pending orders (buy or sell limit orders) just ahead of the 38.2%, 50%, and 61.8% Fibonacci levels to trade in the direction of the prior day’s price action.
For example, if the prior day was a down day (closed lower than it opened), you will place a sell limit order just below each of the Fibonacci levels mentioned. The take profit for each of these will be just above the low of the prior day and the stop loss will be just above the high of the prior day.
Conversely, if the prior day was an up day (closed higher than it opened), you will place a buy limit order just above each of the Fibonacci levels mentioned. The take profit for these orders will be just below the high of the prior day and the stop loss will be just below the low of the prior day.
How Do I Manage the Risk for the Asia Mirror?
Each pair you trade this strategy on should be considered a single trade. In the AUD/JPY setup we used just above, all three positions together will be treated as a single trade. Your risk for all three positions combined should equal whatever you would typically risk on a single trade. If your usual trade risk is 2%, then these three positions should total a 2% loss if they hit the stop loss. We do this because if one of them hits the stop, they all do, so size your positions accordingly. Some traders will start with a very small size at the 38.2% level and increase on each level, allowing them to make more profit with the same amount of risk.
The stop loss is always going to be a set level so calculating your risk should be easy. Be sure to calculate it on the front end and be safe.
Once you test the strategy out and get a feel for it, you can test out tons of different ways to enter and manage the trade. The key is its high probability nature IF the criteria is met in the initial setup. So once you get the hang of it, try different sizing techniques, different stop trailing methods, etc.
We have been using this approach for years and we still are testing and trying out different things.
Hope you liked this strategy and please let J know if you give it a try and what you find!