USDCAD Sentiment Extreme Keeps Breakouts Likely
-Demystifying the popular DailyFX Plus Breakout2 strategy
-Volatility is contracting likely resulting from holiday trading
-The bias towards breakout strategies continues with USDCAD holding an extreme sentiment reading
Over the years, many clients and traders have become interested in trading the DailyFX Plus Breakout2 strategy. It is a popular strategy so this report will attempt to demystify how you determine which currency pair to trade the Breakout2 strategy on.
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.
The Breakout2 strategy can be followed by receiving text alerts of signals or by having the trades automatically placed into your account. Why a trader would choose one method over the other will fall in line with that trader’s personality and their comfort level of ‘controlling’ the trade.
To assess the current market condition, we will focus on four components.
- Average Directional Movement Indicator (ADX)
- Rate of Price Change (ROC)
- Volatility Expansion
- Sentiment through SSI
DailyFX Plus Breakout2 Conviction Chart for January 9, 2015
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. Note in each trading instrument above, the volatility over the past 3 months are slowing. This is likely due to a hangover from the holidays. If this volatility continues to slow, it could bring a drag on the performance of a breakout strategy.
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.
For example, the USDCAD was given a ‘3’ conviction due to an extreme SSI reading of -2 with a strong trend that has been in force lately due to the drop in oil prices.
Therefore, the conditions exist for a potential follow through of a breakout in the USDCAD, EURJPY, AUDJPY, and EURAUD if a breakout trade sets up.
Good luck with your trading!
---Written by Jeremy Wagner, Head Trading Instructor, DailyFX Education
Follow me on Twitter at @JWagnerFXTrader.
See Jeremy’s recent articles at his DailyFX Forex Educators Bio Page.
Feedback? Email Jeremy at email@example.com
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.