It pays to understand how a market works and how the major players think.
Today we are going to do a simple strategy that works during strong breakout days specifically for the USD/JPY pair.
But before that, let’s first discuss the uniqueness of the Tokyo market and the Yen in order for us to understand why this strategy works on specific days.
Because of its location and size, the Tokyo market is quite unique, and this uniqueness offer traders an opportunity to ride its waves. The Tokyo market is the first major market to open. Yes, the Aussie market does open prior to the Tokyo market, but the Aussie market is just not as big to make an impact.
Prior to the Tokyo open, most traders are often inactive. The US market had closed a few hours ahead of its open, and the next big market, London and the rest of the European continent, will be waking up still a few hours later. This gives the Japanese traders a free reign on what they’d want to do with the Yen, because they are not battered by other big players from the London and US markets.
Institutional traders usually have a squawk box beside them which they can hear firm bids and offers from. As they listen in, they usually try to get a feel of what their peers are doing and where they think the market is heading. If there was no big news prior to the open, often the first hour would be a feeling out of the market. If you’d look at a chart, this would result to a relatively small 1-hour candle.
Another key advantage that institutional traders have that retail traders don’t is the “whisper” or “whisper number”. Sometimes a rumor breaks into the market regarding key information that would definitely affect exchange rates. For example, a whisper that the Bank of Japan (BoJ) would be buying bonds could affect exchange rates directly. Or better yet, sometimes a “whisper number” is included, maybe the total amount of bonds the BoJ is willing to buy, or the rate or price they are willing to buy it at. Or sometimes it is just an inflow of foreign capital into the market for a number of reasons. Maybe a flight to safety, or maybe big funds are pulling out of the US and are looking elsewhere to park their money. All these could affect the market in a unique manner.
Yes, it is a fundamental news, but unlike that posted on Forex Factory, these types of news don’t have a spiking effect, since whispers flow into the market at a trickle. What happens instead is a steady rise in price throughout the day.
These characteristics give the Yen a tendency to consolidate and breakout. And this is what we will try to ride on to.
The Setup: Trading the 1st Hour Tokyo Range Breakout on the USD/JPY
This strategy will solely be traded on the USD/JPY pair, since these currencies sometimes go in different directions specially during times of shifting global market sentiment, or better yet BoJ currency interventions like what was mentioned above.
The types of news that we would like to trade are qualitative and not quantitative. Sometimes we would not be hearing about it until it actually happens. We will only see its effect on the market. Below is an example of the type of chart that is plotted during these steadily rising or falling breakouts.
The blue box above represents a whole Tokyo session during a breakout day. Notice how price steadily climbed up every hour throughout the day and retraced with only one bearish 1-hour candle.
Now, that we know what could happen during these types of breakout during the Tokyo session, the question is how do we trade it?
Remember, how traders try to get a feel as to where the market is going on the first hour? That is our que. We will be trading the breakouts out of the first hour box. We are hoping to get the breakout on the direction of the first candle. And hopefully the direction of the next candle is the same as the first hour candle.
Wait for the close of the first hour candle of the Tokyo session.
After the close of the candle place pending Stop Entry Orders a few pips above the high and the low of the candle. Whichever stop order gets triggered first will be our setup.
Cancel the opposite pending Stop Entry Order as soon as one Stop Entry Order is trigerred.
Buy Setup: Initial Stop Loss will be at the same price as the Sell Stop Entry Order.
Sell Setup: Initial Stop Loss will be at the same price as the Buy Stop Entry Order.
Exit: Trailing Stop
Buy Setup: Trail the Stop Loss a few pips below the most recent candle close until the trade is stopped out in profit.
Sell Setup: Trail the Stop Loss a few pips above the most recent candle close until the trade is stopped out in profit.
If the trade is still open as the Tokyo session ends, close the trade at the close of the Tokyo session.
If the candle after the first hour doesn’t breakout of the first hour box, cancel all pending orders.
Breakout strategies are one of the simplest strategies that most beginner traders could start with as they find their own niche in the market. However, breakout strategies are not perfect. Sometimes you win, sometimes not. In fact, strong breakouts that last for a whole session during the Tokyo session doesn’t happen every day.
This particular breakout strategy though is geared towards the breakout of the first hour, since it is when institutional traders are still getting a feel of the market. There are no other big markets that they could get a que from, so waiting for a hint from the first hour candle might be a good idea.
But sometimes, the first hour candle itself is already the breakout. This happens when there was a big news that relates to the Yen or the global market prior to the open, or when a major news comes out during the first hour of the Tokyo session. Don’t go chasing these trades by setting a pending order on long first hour candles.
You could also try to tweak this strategy by having a fixed target price for your exit instead of a trailing stop loss. Some would set targets in pips, while some a multiple of their stop loss. To each his or her own. Tweak it and make it yours.