Talking Points:
-11 of 12 pairs reflect a strong directional trend
-8 of 12 pairs reflect a muted volatility
- NZDUSD sits on top of a 4 year support shelf with SSI at +3
The Plus Breakout2 strategy is one of the more widely followed by traders. This piece aims to identify those markets where breakout conditions are prevalent, and therefore a follow through of the breakout is more likely.
Directional movements have picked up over the past few weeks as 11 of 12 pairs reflect a strong directional trend. This is determined through a review of the ADX and Rate of Change indicators. The biggest thorn in the side right now is relatively tame volatility. 8 of the 12 pairs followed show low levels of volatility which suggest there are pockets of market conditions to keep an eye out for.
Remember, for breakouts to generically be successful, we ideally want to see volatility on the rise.
Plus Breakout2 Conviction Chart for May 28, 2015
| ADX | ROC | Volatility Expansion? | Sentiment Signal | Conviction | |
|---|---|---|---|---|---|
| EURUSD | Trend | Bearish | Yes | Bullish | 2 |
| AUDUSD | Trend | Bearish | No | Bearish | 2 |
| GBPUSD | Trend | Bearish | No | Bearish | 2 |
| NZDUSD | Trend | Bearish | Yes | Bearish | 3 |
| USDCHF | Trend | Bullish | Yes | Bearish | 2 |
| USDCAD | Trend | Bullish | No | Bullish | 2 |
| USDJPY | Trend | Bullish | No | Neutral | 1 |
| EURJPY | Trend | Bullish | Yes | Bearish | 1 |
| GBPJPY | Trend | Bullish | No | Bullish | 1 |
| CHFJPY | Trend | Bullish | No | Bullish | 1 |
| AUDJPY | Range | Neutral | No | Bearish | 1 |
| EURAUD | Trend | Bullish | No | Bullish | 2 |
Bold and italicized ratings illustrate those pairs whose conviction ratings changed from the previous report .
(Created using Trading View Charts)
You’ll notice from the conviction chart above, the NZDUSD was upgraded to a ‘3’ rating. Upon inspecting the NZDUSD price chart, prices sitting on top of a 4 year support shelf at .7108. Additionally, SSI is sporting a +3 reading which means we have three times as many buyers as we do sellers. This group of buyers becomes our future pool of sellers should a break lower develop. In the end, the conditions are ripe for a significant breakout lower.
There is a lot of open space down to the next significant swing low of .65. Additionally, there are wave relationships down near the .61-.64 area so a breakout has the higher potential for follow through.
Last Week’s Conviction Chart – AUDUSD SSI Shifts to Net Buyers
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 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.
---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]