Saturday, March 14, 2015

Test drive of 4H breakout discretionary system

I spent today creating rules for a new 4H breakout discretionary system.

It's based on my research of Asian currency pairs (anything paired with JPY, AUD or NZD). In my research, I noticed that the daily high or low will tend to be established in the first four hours of each trading day (the first hour is very prominent, but the next three hours also have an above-average tendency to form the daily high or low).  

Thus, if we want to enter a position for the next 24 hours, the high or low of the first 4H candle is a good place to put our stop loss. We can enter on the break of the opposite high or low of the 4H candle. 

You can't trade every first 4H candle, obviously. This is where the discretionary part kicks in.

The ideal 4H candle should form off a S/R level or swing point, and be in line with fundamental analysis, and provide a reward of at least 1R.

This is a draft of the system's rules. It's very simple. 


There's a ~50% chance that the daily high or low will be established during the first four hours of the trading day (based on NY close). We can exploit this by entering a position and putting our stop loss near the first 4H high or low, knowing there's a very good chance that this stop loss will not be hit during the day.


1. Can we get a reward of at least 1R?

2. Does the 4H high / low form off a S/R level or swing point?


Does the 4H candle break through a S/R level?

3. Do the fundamentals line up with the trade?


Above the top or below the bottom of the 4H candle.


Possible targets:

- Yesterday's high or low

- BRN (big round number)

- Swing points, S/R


This is the trade I tested today. It's the AUDUSD. Fundamentally, I'm bearish on the AUDUSD. Price has stopped at 0.77000 and formed a resistance level. I went short on the break of the day's first 4H candle, with my stop loss just above the high (an alternative stop loss could be above the swing high). I took profit just above the highs near 0.76000.

(click to enlarge)

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