Talking Points:
- SSI readings remain stable from last week
-Rate of Change analysis shows consolidation of trend
- The bias towards breakout strategies is favored cross pairs such as USD/JPY and GBP/JPY
The Plus Breakout2 strategy is one of the more popular strategies followed. Because it trades breakouts with a sentiment filter, the strategy tends to work well in volatile market conditions.
Over the past two weeks, we have seen volatility stabilize on many pairs while the Rate of Change indicator has become mixed. SSI (Speculative Sentiment Index) has remained stable from last week’s conviction report . This suggests a continuation of the consolidation on previous trends.
Though these ingredients don’t make widespread breakout trading feasible, there are pockets of opportunity.
You will see one noticeable change from last week and it is regarding the USDJPY. The USD/JPY pattern has been clear as we have been following a longer term triangle since December 2014. We are anticipating the last leg (wave E) of the triangle to move lower towards 117 area.
Volatility in the USDJPY is expanding while SSI is showing near extreme readings at +2 suggesting further losses. As a result, many of the ingredients exist for a follow through breakout to the downside and therefore, the USDJPY conviction rating was upgraded from a ‘1’ to ‘2’.
Likewise, the conviction rating for the GBP / JPY was upgraded to a ‘2’ as well. The GBPJPY SSI reading is showing more bullish sentiment. On the backdrop of the USDJPY possibly dropping lower towards 117, that could possibly drag the GBPJPY lower as well. The headwinds on the GBPJPY analysis is that the ROC is showing medium term bullish price trends.
(Those currency pairs with a bold and italicized rating represent a change from last week.)
Plus Breakout2 Conviction Chart for February 13, 2015
| ADX | ROC | Volatility Expansion? | Sentiment Signal | Conviction | |
|---|---|---|---|---|---|
| EURUSD | Trend | Neutral | Yes | Bullish | 2 |
| AUDUSD | Trend | Neutral | Yes | Neutral | 1 |
| GBPUSD | Trend | Bullish | Yes | Neutral | 2 |
| NZDUSD | Range | Neutral | Yes | Neutral | 1 |
| USDCHF | Range | Neutral | No | Bearish | 1 |
| USDCAD | Range | Neutral | Yes | Neutral | 1 |
| USDJPY | Trend | Bullish | Yes | Bearish | 2 |
| EURJPY | Trend | Neutral | Yes | Neutral | 1 |
| GBPJPY | Trend | Bullish | Yes | Bearish | 2 |
| CHFJPY | Range | Neutral | No | Bullish | 1 |
| AUDJPY | Range | Bearish | Yes | Bearish | 2 |
| EURAUD | Trend | Bullish | Yes | Bullish | 3 |
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Though this is written with the Breakout2 strategy in mind, the information contained can be applied to intraday breakout strategies in general. To trade manually, simply analyze the support and resistance levels and buy a break of resistance or sell a break of support.
As you can see in the chart above, the ADX and Rate of Change (ROC) are grouped together. Since the ADX doesn’t indicate direction, only strength of move, we want to couple it with a rate of change indicator.
When trading a breakout strategy, ideally we would like to see prices in a trend and moving. This would increase the chance of a breakout that would follow through. If prices are in a range and if the ROC is neutral, that indicates there isn’t prices are comfortable near the current levels until a catalyst creates discomfort for the price.
Ideally, we would like to see a directional move take place with expanding volatility. Expanding volatility can be measured through analysis of ATR range or perhaps volume expansion.
The fourth item is sentiment as read through SSI. The result of the “Bearish” means the SSI reading is > 1.22 and “Bullish” means SSI is <-1.22. For a current reading of SSI, log into Plus and view the Speculative Sentiment Index section (SSI).
When taking this together and a conviction reading is assigned. It is important to understand the conviction reading is the opinion of the author and not a recommendation to trade, use, or not use the Plus Breakout2 strategy.
A conviction rating of ‘3’ means the ingredients exist for a breakout market condition that the Breakout2 strategy enjoys. A reading of ‘1’ represents a mixed bag and that the Breakout2 strategy is more at risk of a market condition that doesn’t cater as well to breakouts.
For example, the EURAUD was given a ‘3’ conviction due to an extreme SSI reading of -2 with a strong trend in place.
Therefore, the conditions exist for a potential follow through of a breakout in the EURAUD, if a breakout trade sets up.
---Written by Jeremy Wagner, Head Trading Instructor, Education
Follow me on Twitter at @JWagnerFXTrader.
See Jeremy’s recent articles at his Forex Educators Bio Page.
Feedback? Email Jeremy at [email protected]