GBPJPY Sentiment Remains Elevated

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Talking Points:

-GBPJPY SSI remains elevated at +2.0

-Volatility contraction is not ideal for the Breakout2 strategy

-Range conditions prevail for the main pairs

We have been following the DailyFX Plus Breakout2 strategy for the past several weeks as it is widely followed by many traders. This piece aims to identify those markets where breakout conditions are prevalent, and thus a follow through of the breakout is more likely.

Well, volatility has fallen significantly and generally speaking, meaningful breakouts are absent. To add more salt to the breakout wound, sentiment readings are fairly tame as well. As a result, be VERY selective if you choose to employ breakout strategies in this market environment. Also, remember, that not implementing a breakout strategy IS a strategy.

When viewing the potential for a breakout, the GBPJPY is the one which is still hanging by a thread as its Speculative Sentiment Index (SSI) reading continues to remain elevated. The strength of trend and volatility expansion has been absent which could mean a consolidation before the breakout.

GBPJPY 4 Hour Chart

(Created using FXCM’s Marketscope charts)

Upon inspection of the chart above, it is possible to count this upward correction complete. If indeed this is the case, then prices could fall several hundred pips which aligns with the SSI filter on the Breakout2 strategy.

Therefore, the GBPJPY is the sole currency pair with a ‘2’ rating below. Still not outstanding, but it does stand out as the only pair not at a ‘1’ rating.

DailyFX Plus Breakout2 Conviction Chart for February 27, 2015

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Last Week’s Conviction Report: GBPJPY SSI Bearish Signal Grows More Extreme

Bold and italicized ratings above represents a change in the rating from last week. You’ll notice that several of the ratings were downgraded as the conditions are no longer ripe for follow through of a breakout.

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.

The fourth item is sentiment as read through FXCM’s SSI. The result of the “Bearish” means the SSI reading is > 1.22 and “Bullish” means SSI is sign up for a free trial if you don’t have a live FXCM account) 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.

---Written by Jeremy Wagner, Head Trading Instructor, DailyFX Education

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.

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Feedback? Email Jeremy at jwagner@dailyfx.com

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