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Filtering False Breakouts
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…rules behind this strategy are specifically developed to take advantage of strong trending markets that make new highs that then proceed to fail by taking out a recent low and then reverse again to make other new highs. This type of setup tends to have a very high success rate as it allows traders to enter strongly trending markets after weaker players have been flushed out, only to have real money players reenter the market and push the pair up to make major highs.

Strategy Rules

Long

•  Look for a currency pair that is making a 20-day high.

•  Look for the pair to reverse over the next three days to make a two-day low.

•  Buy the pair if it takes out the 20-day high within three days of making the two-day low.

•  Place the initial stop a few pips below the original two-day low that was identified in step 2.

•  Protect any profits with a trailing stop or take profit by double the amount risked.

Short

•  f. Look for a currency pair that is making a 20-day low.

•  Look for the pair to reverse over the next three days to make a two-day high.

•  Sell the pair if it trades below the 2-day low within three days of making the two-day high.

•  Risk up to a few ticks above the original two-day high that was identi­fied in step 2.

•  Protect profits with a trailing stop or take profit by double the amount risked.

Examples

Take a look at our first example in Figure 8.19. The daily chart of the GBP/USD shows that the currency pair made a new 20-day high on No­vember 17 at 1.8631. This means that the currency pair gets onto our radar screens and we prepare to look for the pair to make a new two-day low and then rally back beyond the previous 20-day high of 1.8631 over the…

Figure 8.20 USD/CAD Filtering Fake Breakouts Chart

( Source: eSignal. www.eSignal.com)

Figure 8.21 USD/JPY Filtering Fake Breakouts Chart

( Source: eSignal. www.eSignal.com)

ur last example is on the short side. Figure 8.21 is a daily chart of USD/JPY. The chart illustrates that USD/JPY made a new 20-day low on October 11 below 109.30. The currency pair then proceeded to make a new two-day high on October 13 of 110.21. Prices then reversed over the next two days to break below the original 20-day low, at which point our sell order at 109.20 (a few pips below the 20-day low) was triggered. We placed our stop a few pips above the two-day high at 110.30. As the cur­rency moves in our favor, we have two choices: either to take profits by double the amount that we risked, which would be 220 pips in profits, or to use a trailing stop such as a two-bar high. The two-bar profit would have the trade exited at 106.76 on November 2, while the 220-pip profit would have the trade exited at 107.00 on October 25.

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