Price Action Trading: Asian Market Open Strategies

Introduction

This video serves as a core component of a month-to-month subscription, focusing on price action trading at the open of the Asian market sessions. It involves weekly analysis based on real-time market action.

Trading Energy at the Open

At the open of the Asian market session, the primary focus is on trading "energy", which is described as pent-up energy from overnight or newly generated energy for the day.

The Trader's Equation and the Missing Link

The trader's equation, composed of risk, reward, and probability, is particularly relevant at the open due to the impact of energy dynamics. The missing link in this equation is the individual trader's psychology which is crucial for success.

The market will present various challenges at the open, requiring traders to identify and align with the strongest energy flow that matches their strategies. It's important to accept that on some days, the market's energy may not align with your strategies, and it's best to refrain from trading and return the next day.

Decisive Trading and Reflection

When a strategy manifests, traders should act decisively and manage their trades precisely. It is important to allocate time for reflection on your decisions at the end of each day or week to assess your performance against your strategies.

Avoiding Burnout

Being swayed by every market movement, especially at the open, can lead to losses and a loss of confidence. Rebuilding confidence requires mastering one's own psychology, which is the crucial missing link in the trader's equation.

Components of the Trader's Equation

The trader's equation consists of:

  • Risk: Determined by capital allocation decisions.

  • Reward: Determined by capital management decisions.

  • Probability: Based on consistent application of strategies across a range of trades (e.g., 20 trades on higher time frames or 100 trades on lower time frames).

  • Psychology (The Missing Link): The trader's inner peace and tranquility that must be maintained. Violation of this can lead to poor decisions and the need to rebuild one's trading approach.

Strategies and Risk-Reward Profiles

Different strategies carry different risk-reward profiles:

  • High Risk, High Reward: Examples include breakout and reversal strategies. These have a lower win rate (e.g., 40-60% win ratio in a basket of 100 trades) but offer substantial returns.

  • Medium Risk, Medium Reward: Trading ranges, aiming for a 50/50 win rate, but with lower yield per trade.

  • Low Risk, Low Reward: Trend-following strategies, with a higher win rate (e.g., 60% or higher) and moderate returns.
    Traders must align their strategy with their psychological comfort zone. The market will guide traders toward strategies that suit their peace and tranquility.

Four Key Strategies for Trading the Open

The presenter looks at four distinct strategies for trading the open of the Asian market sessions:

  1. First, second, or third candle breakout trades.

  2. Trading trend resumption after a pullback following a strong breakout.

  3. Trades from two push reversal patterns.

  4. Trades from three push reversal patterns.

Market Sessions

There are three broad market sessions:

  • Asian session (includes New Zealand, Australia, Japan, Hong Kong, Singapore).

  • London session/European session (includes UK, France, Germany).

  • U.S. session (includes New York).

These sessions cover the 24-hour trading day, moving from east to west.

Defining the Open of the Asian Session

For price action trading, the open of a specific session is defined as:

  • The first candle when the key exchange opens.

  • The subsequent one to two hours of trading.

For this course, the Tokyo Stock Exchange is used as the key opening exchange for the Asian session due to its high volume.

Specific Market Open Times

When trading the Hang Seng 50, the official start time is 09:30 AM in Hong Kong. The Tokyo Stock Exchange opens at 9:00 AM in Japan, which corresponds to 2:00 AM GMT.

Market Behavior and Strategy Transitions

Market behavior typically transitions after the first one to two hours of the open. Different strategies are required as market conditions change, and these are covered in detail in the presenter's best price action strategies course.

Three Broad Periods in a Trading Day

  1. The open (first one to two hours).

  2. The middle (three to four hours in between).

  3. The end of the day (last one and a half to two hours).

Overlaps occur between market sessions (e.g., the end of the Asian session coincides with the open of the London session), leading to increased volume and dynamic market activity. These categories help traders transition to different strategies as market conditions evolve.

Fractal Nature of Markets

Markets are fractal, meaning that chart patterns repeat across different time frames. The strategies discussed can be applied to various time frames, such as five-minute charts or one-hour charts.

Key Levels of Support and Resistance

Filtering lower time frame charts requires identifying important price action around key support and resistance levels. Preparation involves marking these levels on charts:

  • Monthly chart: All-time high, all-time low, high of last year, low of last year, and significant support and resistance levels.

  • Daily chart: High of last month, low of last month, bull/bear breakout levels, and other distinct levels.

These levels are marked to quickly assess market reactions. Hidden levels of support and resistance exist and will be discussed later.

Daily Chart Preparation

  • Mark the high and low of the previous day (e.g., lime green for high, red for low).

  • Mark any key levels of support and resistance from the previous session.

  • As the day unfolds, mark the open of the current session and any measured moves of the first, second, or third candle.

  • Mark the measured moves of any trading range at the open.

First, Second, or Third Candle Breakout Trades

Bull Breakouts

When a strong first candle bull breakout occurs, traders should promptly enter the trade. Each subsequent trend candle extends the measured move. For example:

  • If the low of the first candle is L1 and the high of the third candle is H3, the measured move is H3 - L1.

  • The market is likely to reach this distance if the bulls are strong before pulling back.

It is important to take only one trade at a time to allow for clearance before considering additional trades.

Identifying Breakout Candles

Look for breakout is a trend candle that closes near its high with a small or no tail at the top. Avoid buying above candles showing significant weakness (i.e., those with tails extending a quarter to half the candle length).

Examples

Hang Seng 50

At 09:30 AM Hong Kong time, the first candle shows a breakout. Trader enters and expects a measured move. The measured move is the height of the third candle to the beginning of the first candle.

Nikkei 225

First candle trade with a small tail at the open. Use the Fibonacci retracement tool (markers at 50, 100, and 200) to gauge measured move.

Bear Breakouts

Look for candles that test high then closes near their low. Trader enters and expects a measured move one to one.

Stop Loss Strategies

When using high test candles for short positions, consider one of the following options for stop placement:

  • Tight Stop: Place the stop loss just above the high of the entry candle for a 1:1 risk-reward ratio.

  • Measured Move Stop: Widen the stop loss based on a measured move to reduce the likelihood of being stopped out prematurely; this may result in a reduced risk-reward ratio (e.g., 0.5:1).

Case Study: Dodgy Candle

  • If the market initially creates a large bullish candle, but it subsequently reverses to form a candle with a significant upper tail, it indicates a "dodgy candle".

  • Although these candles can be risky, a trade can still be taken with the expectation of reaching a 1:1 measured move.

Currency Example: AUD/JPY

At the opening of the Tokyo Stock Exchange, the first candle of AUD/JPY closes below previous levels:

  • This suggests a short opportunity, but confirmation is needed due to the price movement that has already occurred.

  • A trader might wait for the second candle to confirm bearish momentum before entering a sell position. The currency must close beneath the earlier levels.

Stops:

  • Tight Stop: Place the stop loss close to the entry point.

  • Wider Stop: Look to the left of the chart for significant levels and place the stop loss above these levels.

Currency Example: NZD/JPY

At the opening of the Tokyo Stock Exchange, the First candle closes below the prior low, which is a short opportunity. Consider using a minimum stop loss of 15 pips for currency pairs due to spreads and market volatility. This is the general guideline.

Breakout Pullback Trades

If you have missed a first, second, or third candle breakout, or if current prices have moved far enough away from your entry to put your stop loss near breakeven, you can look to scale into the trade. Wait for a pullback, then enter the original direction of the trade when the trend resumes. If you're not in breakeven, do nothing.

  • Trend Resumption: Wait for the first pullback after a strong breakout before re-entering the market as the initial trend resumes.

  • Stop placement: Use a measured move stop rather than a tight stop for breakout pullback trades.

Trend Resumption After First Pullback (Breakout Pullback I1)

Trend is already in motion, so there will be a strong breakout already established. Wait for that first pullback, then get back in. Place measured move stop at the height.

Currency breakouts: Look for the currency to breakout above a trading range. Once that happens, get into the market.

Two Push Reversal Patterns

A two push reversal pattern occurs when the market attempts to move in a specific direction twice but fails, indicating a potential reversal.

Large Tails Analysis

Large tails indicate strong buying.

Failed Breakout (FBO)

Another two push reversal pattern that occurs with bears. If their is one push down, and a failed breakout, that is a trade that can be taken.

Strategy: two pushes down by bears, follow this trend, and buy if bears created a failed breakout below first candle. Bulls might reach the target.

Micro Double Bottom

Bulls create higher low for all of the earlier price action currency.

Bear Breakout Example: Hang Seng 50

Bear breakout after a trading range open and after two push patterns.

Strategy: if there is a first candle will tails on top or tails below, wait for more information.

Best to Wait Strategy

Best to wait and see if bears can continue breakout because traders do not know if trading range will carry on.

Three Push Reversal Patterns

Definition

Anytime you have three pushes, it's a wedge top. Note that it may not look like a wedge, but this is in terms of price action. Three pushes can become a trading range and a pullback.

Market Psychology

Three pushes also mean there are three tails/reversal on the chart. This is also the first push by the Bulls.

Bear Breakout from a Three Push Reversal

Look for three attempts by the Bulls to go up. If the bulls fail three times, then sell when you see the market beginning to go down.

Microwedge vs Wedge Top

Microwedges are small or short wedge patterns within a trend. They reflect the same forces that create a large wedge top pattern with short and fast price action.