Asian Session False Breakout

Wednesday’s price action (3 Nov 2010) in the GBP/USD provided a good reminder of the importance of being aware of the key market structure and timeframe influences that exist in our markets.

In forex, one of the most obvious features is the typically narrow range Asian Session. (See here for a related article on the forex trading sessions)

While a breakout of this narrow range can often lead to great trending moves, an even better scenario occurs when we get a false breakout.

So… here’s a rule to add to your Lessons Learnt book: A failed breakout of the Asian Session range has a high probability of a trending move in the opposite direction.

Looking at the 30 minute chart of Wednesday’s session we see the Asian Session at (1), defined by the red support and resistance lines which contain price within a narrow range of approximately 25 pips.

With only a half an hour to go before Europe opens, traders sold the market at (2), forcing a breakout through the lower support level. This is definitely a low odds trade – a breakout pre-session, right into the 1.6000 round number area, plus an area of support (3) and a lower area (4). What were these traders thinking???

The European Session opens at (5), drives only 4 pips below the low of the previous breakout candle, and reverses. The first 30 minutes produces a high-close range candle, clearly showing a stall and potential reversal in sentiment. The candle closed right at the point of breakout, meaning that anyone who entered short is now sitting on a loss of anywhere between 0 and -15 pips, depending on where they entered. If you’ve ever caught a false breakout, you’ll know this feeling – it’s not nice at all.

Any continuation higher will likely find a great source of bullish orderflow, as our trapped shorts are stopped out of their position (with the bulk of the stops likely to be just above the breakout point and above the Asian Session highs).

This orderflow produces a great trend, as shown at point (6).

For forex traders… burn this one into your brain… A failed breakout of the Asian Session range has a high probability of a trending move in the opposite direction.

For traders of other markets… study your market and find similar market structure and timeframe features.

Lance Beggs

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