News & Analysis at your fingertips.

We use a range of cookies to give you the best possible browsing experience. By continuing to use this website, you agree to our use of cookies.
You can learn more about our cookie policy here, or by following the link at the bottom of any page on our site.

0

Notifications

Notifications below are based on filters which can be adjusted via Economic and Webinar Calendar pages.

Live Webinar

Live Webinar Events

0

Economic Calendar

Economic Calendar Events

0
Free Trading Guides
EUR/USD
Mixed
Oil - US Crude
Mixed
Wall Street
Mixed
Low
High
of clients are net long.
of clients are net short.
Long Short

Note: Low and High figures are for the trading day.

Data provided by
Gold
Bearish
GBP/USD
Mixed
USD/JPY
Mixed
More View more
Real Time News
  • Emotions are often a key driving force behind #FOMO. If left unchecked, they can lead traders to neglect trading plans and exceed comfortable levels of risk. Read on and get your emotions in check here:https://t.co/eILWbFgHRE https://t.co/DjMdgL5x19
  • Technical indicators are chart analysis tools that can help traders better understand and act on price movement. Learn more about the importance of technical analysis here: https://t.co/NpC1D8y4Aa https://t.co/6sqqRfTri2
  • The British Pound, Australian Dollar and US Dollar may all experienced heightened periods of volatility as geopolitical risks in North America, Asia and Europe rattle global financial markets. Get your $GBPUSD market update from @ZabelinDimitri here:https://t.co/0EFToM5Y8I https://t.co/5gsZQfX6aG
  • The New Zealand Dollar may continue to outperform the haven-associated US Dollar as price breaks above key long-term resistance. Get your $NZDUSD market update from @DanielGMoss here:https://t.co/D1DxtDkJXd https://t.co/DwkK9F9FCJ
  • #Gold prices declined following bearish technical cues, but a key zone of support was reinforced over the past 48 hours. #XAUUSD volatility risk is elevated ahead of the #USElection - https://www.dailyfx.com/forex/technical/article/fx_technical_weekly/2020/10/30/Gold-Technical-Forecast-Election-Raises-Volatility-Risk-But-Support-Holds.html?CHID=9&QPID=917702&utm_source=Twitter&utm_medium=Dubrovsky&utm_campaign=twr https://t.co/5hgGEojvIE
  • What is the US Dollar outlook based on retail positioning ahead of the November 3rd presidential election? EUR/USD may fall as AUD/USD rises. Which way could USD/CAD capitulate? Find out from @ddubrovskyFX here:https://t.co/BVoIcR9anM https://t.co/Frmn9y6yKJ
  • US #COVID19 cases hit a record for a second consecutive day -BBG
  • The Indian Rupee may weaken following a breakout higher in USD/INR. Despite rising global stock market volatility, the Nifty 50 has been holding its ground. Could it capitulate lower? Find out from @ddubrovskyFX here:https://t.co/BNJ5uTKz1A https://t.co/VkvmiwWAtz
  • The US Dollar gained, pushing USD/SGD to break higher. However, USD/IDR may be looking at losses ahead. USD/MYR struggled to breach the March trendline. USD/PHP could rise.Get your market update from @ddubrovskyFX here:https://t.co/6W76mWMRrJ https://t.co/ukJG4eqDK0
  • The #DowJones and #SP500 have as of today averaged: -2.16% & 1.43% 3-months and 1-year before #Election2020 respectively What could this mean for the incumbent president/Trump next week? 👇 https://t.co/e4EyLTzRXl
Trading Against the Forex Crowd in Volatile Currency Markets

Trading Against the Forex Crowd in Volatile Currency Markets

2013-02-06 12:00:00
David Rodriguez, Head of Product
Share:

In our guide to FXCM Speculative Sentiment Index-based trading strategies, we discussed the “why trade against the crowd?” with a specific look to our SSI. This article covers the “how can we trade against the crowd?” with a closer look at the Breakout2 channel breakout strategy.

The Breakout2 trading system has been one of our more successful trading strategies in past years. We need to emphasize that past performance is not indicative of future results, but the strategy has historically done well in fast-moving markets with strong volatility.

Trading Rules for the FXCM Speculative Sentiment Index-Based Breakout2 Strategy

Automate the Breakout2 trading system via Mirror Trader free of charge

forex_crowd_breakout_trading_body_MirrorTrader.png, Trading Against the Forex Crowd in Volatile Currency Markets

Buy Rule: Buy 5 lots when the currency breaks above its highest high of the past 24 hours.

Sell Rule: Sell 5 lots when the currency breaks below its lowest low of the past 24 hours.

Trade Filter: Breakout2 may only take short positions if the SSI ratio is at 1.22 or greater (55% of orders are long). It may only go long if the SSI ratio is at -1.22 or below (55% of open orders are short).

Profit Targets: Measure the 90-day Average True Range of the Pair. Place 4 limit orders every 0.5 ATR away from entry price.

Stop Losses: Measure the 90-day Average True Range of the Pair. Place 4 stop loss orders every 0.5 ATR away from entry price.

If long, place a trailing stop loss order at the 24-hour range low. If short, place a trailing stop loss order at the 24-hour range high. Note: the trailing stop will close the entire position if triggered regardless of whether any of the 4 ATR-based stops or limits are triggered.

Reviewing and Understanding the Logic of the Breakout2 System

Entries: Buys 5 lots when currency breaks its 24-hour high, sells 5 lots when it breaks 24-hour low: This is a high volatility strategy similar to our volatility-filtered Donchian channel breakout system. It does multiples of 5 lots so that it may scale out of orders. Like most breakout systems, it will more often do well when prices are breaking significantly higher or lower.

These are also the market conditions in which the trading crowd will most often be buying into weakness or selling into strength.

Thus the trades often have a stronger chance of success if they occur within larger market trends. i.e. we buy breakouts in an uptrend, sell breakdowns in a downtrend.

Filter: Can only buy if SSI at -1.22 or below (55% of traders are short), can only sell if SSI is at 1.22 or above (55% of traders are long): Breakout trades will often work best when they are in the direction of the larger trend. In other words, buying a topside breakout likely has a greater chance of success if done in an uptrend. Selling a breakdown is more likely to succeed in a downtrend.

SSI can tell us whether or not a currency pair is in an uptrend or in a downtrend—remember, most traders buy weakness and sell strength. If price is very volatile, we are more likely to see major breaks of support and resistance. Volatility likewise improves the performance of our benchmark channel breakout strategy.

Exits: Take the daily Average True Range of the currency pair for the past 90 days. Breakout2 places 4 stops and limits 0.5 ATR away from entry price. It places a fifth stop at the trailing 24-hour high or low. A trigger of the trailing stop will close the entire position.

Breakout2 uses a mix of fixed profit targets and stop losses that in our opinion improves its chances of overall success. Why a combination of both fixed and trailing profit losses/targets?

Breakout trading is often a lower-probability mode of trading. We offset the fact that positions are often unprofitable by employing a positive reward-to-risk profile and locking in a certain amount in profits without undue risk. That explains the fixed profit targets and stop losses.

The trailing stop is our way to allow the position to move in our favor without being closed out prematurely. If this is clearly the start of a much larger breakout, the trailing stop will keep us in the position for an extended period of time.

Automate the Breakout2 trading system via Mirror Trader free of charge

forex_crowd_breakout_trading_body_MirrorTrader.png, Trading Against the Forex Crowd in Volatile Currency Markets

Strategy Tips and Resources – How We Use Breakout2

Not all market conditions suit the Breakout2 trading strategy, and as such there are definitely factors to keep in mind before taking any of its trade ideas.

Our research on the Donchian channel breakout system shows that it has historically done better during times of strong market volatility. How do we define volatile market conditions?

In our Weekly Strategy Outlook report, we cover market conditions with a special focus on volatility and prices in forex options markets. We report the “Volatility Percentile” of individual currency pairs, which tells us how much options traders believe the currency pair will move as compared to the past 90 days.

Our research shows that Breakout2 tends to do better when that number is at 50% or higher.

Our Forex Technical Analysis page shows a daily update of our Volatility Percentile figure:

forex_crowd_breakout_trading_body_Picture_38.png, Trading Against the Forex Crowd in Volatile Currency Markets

Past performance is not indicative of future results, but our experience shows that using the volatility percentile in conjunction with the Breakout2 strategy offers good trading ideas.

Automate the Breakout2 trading system via Mirror Trader free of charge

forex_crowd_breakout_trading_body_MirrorTrader.png, Trading Against the Forex Crowd in Volatile Currency Markets

--- Written by David Rodriguez, Quantitative Strategist for DailyFX.com

To receive the Speculative Sentiment Index and other reports from this author via e-mail, sign up to David’s e-mail distribution list via this link.

Contact David via

Twitter at http://www.twitter.com/DRodriguezFXFacebook at http://www.Facebook.com/DRodriguezFX

New to forex? Sign up for our DailyFX Forex Education Series

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

DISCLOSURES