Talking Points:
-9 of 12 currencies showing a strong ADX trend
-9 of 12 pairs reflect an extreme SSI reading
-Number of USDCAD shorts increased 26% over last week
The DailyFX Plus Breakout2 strategy is one of the more widely followed by forex traders. This piece aims to identify those markets where breakout conditions are prevalent, and therefore a follow through of the breakout is more likely.
The forex market has broken out lately as the strong trends are firmly in force. 9 of the 12 currencies followed are showing strong ADX readings above the 25 threshold on the 4 hour chart. For the breakout strategy to work well, we need to see strong directional moves and an elevated ADX reading contributes positively.
On the forex sentiment front, 9 of the 12 pairs are showing extreme SSI readings. An extreme SSI reading is when the pair sports a reading of greater than +2 or less than -2. Extreme sentiment against strong trends provides fuel for those trends to continue and favors a breakout strategy.
As a result, we wish to highlight the USDCAD. With an SSI reading of -2.7, 73% of the traders are already positioned to the short side of the trade. Since the pair is testing 6 year highs, traders are currently positioned against the near term trend.
What really makes the SSI figure interesting is the change in orders. Over the past week, long positions have fallen 2.8% while short positions have increased 33.3%.
This means there has been a substantial change in order flow to more short sellers. Remember, these traders are already positioned to the short side. To close out their short trade they become a future supply of buyers.
Against the back drop of Elliott Wave Analysis, it appears we may be continuing higher in green wave (v). So the wave count suggests there is further room to rise.
(Click on the chart to zoom in; after zooming in, press the play button towards the right to set the market in motion)
Created using TradingView Charts
DailyFX Plus Breakout2 Conviction Chart for July 10, 2015
| ADX | ROC | Volatility Expansion? | Sentiment Signal | Conviction | |
|---|---|---|---|---|---|
| EURUSD | Trend | Neutral | Yes | Bullish | 3 |
| AUDUSD | Range | Bearish | Yes | Bearish | 2 |
| GBPUSD | Trend | Neutral | No | Bearish | 1 |
| NZDUSD | Range | Bearish | Yes | Bearish | 2 |
| USDCHF | Range | Neutral | No | Bearish | 2 |
| USDCAD | Trend | Bullish | Yes | Bullish | 3 |
| USDJPY | Trend | Neutral | Yes | Bearish | 2 |
| EURJPY | Trend | Bearish | Yes | Neutral | 1 |
| GBPJPY | Trend | Bearish | Yes | Bearish | 2 |
| CHFJPY | Trend | Neutral | No | Bullish | 1 |
| AUDJPY | Trend | Bearish | No | Bearish | 2 |
| EURAUD | Trend | Bullish | Yes | Bullish | 3 |
Bold and italicized ratings illustrate those pairs whose conviction ratings changed from the previous report.
To receive future articles emailed to you regarding the conviction ratings for the DailyFX Plus Breakout2 signals or trading an automated portfolio, sign up for the distribution list here.
Other charts with ‘3’ conviction ratings include the EURUSD and EURAUD.
With more negotiations taking place on Greece, many traders are squaring their EURUSD positions through the weekend. However, the pair appears to have carved out a bullish reversal sequence on July 7 by virtue of a leading diagonal. If true, we could be embarking upon a wave (iii) higher towards 1.13.
Likewise, the EURAUD is showing a ‘3’ conviction rating as we appear in the middle of a wave 3 of 3. Wave 3’s tend to be the longest and strongest so there is likely continued movements higher towards 1.59 as this suggests EUR out performance as well.
---Written by Jeremy Wagner, Head Trading Instructor, DailyFX Education
Email me at jwagner@dailyfx.com if you have problems copying/zooming in on the price chart above. Feel free to comment on the chart with your views.
The DailyFX Plus Breakout2 strategy can be automated. If you wish for the trades to trigger automatically into your account, register for a Mirror account which provides you access to dozens of other strategies as well.
Follow me on Twitter at @JWagnerFXTrader.
See Jeremy’s recent articles at his DailyFX Forex Educators Bio Page.
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 DailyFX 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 DailyFX 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.
