asia trading strategy

Asian Trading Strategies – How To Trade Asian Markets – Rules, Backtest, Returns

With the world getting increasingly connected online, it is now easier to diversify your investment portfolio into other economies. Asia is home to tens of thousands of investment opportunities; you can choose to invest in anything from safe large-cap stocks in Singapore to high-growth frontier market stocks in Vietnam. But what are Asian trading strategies?

There are different ways to invest in the Asian financial markets. You can invest in exchange-traded funds (ETFs) or directly trade the stocks via international brokers like Interactive Brokers. You can also invest through American Depository Receipts, which trade on the OTC markets and can easily be bought via your broker.

In this post, we take a look at Asian trading strategies, and at the end of the article, we provide you with some backtests.

Related reading:

How can you trade Asian markets?

Here are the four common ways you can trade the Asian markets:

  1. Exchange-traded funds (ETFs): The easiest way to invest in the Asian market is to buy ETFs that track the various markets in Asia, and there are many Asian index ETFs you can invest in. Investing in such index funds offers the advantages of broad diversification at a lower cost than you might otherwise be able to achieve by attempting to build the positions directly.
  2. Depository Receipts: You can buy their depository receipts of Asian stocks in your country of residence. A depositary receipt (DR) is a certificate issued by a bank that represents shares in a foreign company that is traded on a domestic stock exchange. It allows you to hold equity in foreign countries and provides an alternative to trading on an international market. The American depositary receipts (ADRs) trade on the OTC market and can be bought via your broker.
  3. Directly trading the stocks: While purchasing stocks on foreign exchanges is more difficult than purchasing ADRs, there are online brokerages that allow you to buy and sell securities directly on select international markets. One broker that offers access to most stock exchanges around the world is Interactive Brokers. If you are not a client of the broker, you should inquire with your broker about direct access to Asian stocks. That said, investing in single stocks is risky. Most stocks end up practically worthless and you need to know what you are doing.
  4. Asian stock CFDs: While this is not often recommended, you can trade Asian stock CFDs via a CFD broker, such as IG, eToro, and so on. If your interest is just to gain from price movements rather than owning the underlying stocks, this might be a good option. It is best used for short-term trading and speculation, not investing, as it does not offer you the ability to own the asset. We don’t recommend trading or investing in CFDs. We prefer to invest directly in stocks or ETFs (the latter the most).

Asian ETFs

These are some Asian ETFs that trade on US exchanges:

  1. iShares MSCI Emerging Markets Min Vol Factor ETF (EEMV): EEMV gives investors access to stocks in many of the fastest-growing economies in the world by providing exposure to emerging market equities. Because the underlying index includes stocks that have historically displayed low volatility relative to the general market, EEMV may be good for long-term holding.
  2. iShares MSCI South Korea ETF (EWY): EWY provides targeted exposure to the South Korean economy. It is the most liquid and well-liked way to gain exposure to the South Korean economy. Given its specific concentration, EWY is best suited for investors who wish to adjust their exposure to international equities or plan for short-term trading in the market.
  3. iShares MSCI India ETF (INDA): INDA offers exposure to Indian equity markets, which makes it good for investors looking to access the Indian market, an emerging market with tremendous growth potential. Considerable India exposure is a part of many broad-based emerging markets ETFs, but INDA focuses more on large-cap stocks, with just about 70 components in total and a heavy allocation to the top ten holdings.
  4. Vanguard FTSE Pacific ETF (VPL): VPL offers a low-cost option for accessing advanced Asia Pacific economies. It consists almost entirely of developed market exposure, with Japan accounting for most of the portfolio and Australia also making up a significant chunk. The ETF is certainly useful as a short-term trading vehicle for those seeking exposure to advanced Asian economies. While it can potentially be used as a core holding in a longer-term portfolio, it should be noted that VPL offers no exposure to emerging Asian economies. Later in the article we backtest this ETF.
  5. iShares MSCI Taiwan ETF (EWT): EWT offers exposure to Taiwanese equities, and is the most liquid and most popular option for achieving exposure to the quasi-developed economy of Taiwan. You can use it for short-term trading or add it to your long-term portfolio. All major market in Asia has its own ETF.

How many Asian markets can you trade?

On the Asian continent, there are over 35 distinct stock exchanges, providing investors with more options than in any other region of the world. However, access to some of the exchanges is often limited, especially the exchanges in mainland China. The easiest market to access in the Asian region is the Japanese market. Even Warren Buffett and Berkshire Hathaway have invested in Japanese stocks. After the crash in the late 1980s, Japanese stocks were valued cheaply after the year 2000.

In fact, almost any major brokerage firm in the United States or Europe can execute international trades on the Tokyo Stock Exchange (TSE). This is why Japanese stocks are so popular globally. Hong Kong, Singapore, and South Korea are other Asian markets that are easy to access. You may gain access to the Shanghai and Shenzhen exchanges via the Hong Kong Stock Connect. Interactive Brokers allows most retail traders access to these markets.

What are the biggest Asian markets?

Asia is home to some of the biggest financial markets, including the following:

  • Hong Kong Stock Exchange (HKX): Hong Kong is a global city with an important stock exchange that serves as China’s financial gateway to the rest of the world. There are over 2,500 publicly traded companies on the HKX, with a combined market capitalization of USD 6 trillion.
  • Tokyo Stock Exchange (TSE): The Tokyo Stock Exchange is consistently ranked among the world’s largest, with over 2,000 publicly traded companies with combined market capitalizations exceeding $5 trillion.
  • Singapore Stock Exchange (SGX): The Singapore Exchange (SGX) is Southeast Asia’s largest stock exchange. It currently has 776 companies listed and a market capitalization of nearly $800 billion. Not bad for a city-state with a population of approximately six million people.
  • Shanghai Stock Exchange (SHE): More than 2,000 companies are listed on the Shanghai Stock Exchange (SHE), the world’s third-largest stock exchange with a total market capitalization of more than $7 trillion.
  • Korea Exchange (KRX): The Korean stock exchange, which has a market capitalization of more than two trillion US dollars, is home to over 3,000 companies.

When are Asian markets open?

Asian stock exchanges open Monday through Friday from around 9:00 am Local Time (GMT+9:00), except on days that are national holidays. Each nation keeps its own holiday calendar.

When is the Asian trading session (GMT)?

Since the Asian region has multiple big stock exchanges, the exact trading hours will depend on the exchanges you are interested in. The Japanese and South Korean markets are the first to open at 12:00 am GMT, and the session lasts till around 10:00 am GMT when the Indian market closes.

Can you trade Asian pairs (forex)?

Yes, you can trade the currencies of Asian countries against the USD or EUR. For example, you can trade EUR/JPY, USD/JPY, USD/SGD, USD/HKD, USD/KRW, or USD/INR.

Asian trading strategies backtest

How do you trade Asian markets?

We’ll show you one example in this section of the article. We backtest a specific setup with strict trading rules and backtest it.

We backtest the ETF with the ticker code VPL. This ETF has the current exposure as of today:

Asian trading strategy - VPL

As you can see, it has no emerging market exposure.

The first backtest is trading strategy #1, which we have behind a paywall. If we employ those trading rules on VPL, we get the following equity curve:

Asian trading strategies

There are 124 trades, with an average of 0.68% per trade. Even though you are invested just 9% of the time, you beat buy and hold (including dividends): 4.4 vs. 4.3%. Due to the low exposure, max drawdown is only 20% vs. 55% for buy and hold.

Asian trading strategy #2

Let’s make a second backtest: we employ the exact same trading rules as we do in strategy #81 Tuesday trading strategy:

Asian trading strategy

This strategy, which works very well for US stocks, works equally well for Asian stocks: the average gain per trade is 0.89% (98 trades). Even though you are invested less than 5% of the time, you make 4.5% annually, on par with buy and hold.

Please keep in mind that VPL trades US hours. The results might be very different if you use the same strategy on assets trading local time (Asian local time).

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