False Breakout Filtering

January 4, 2008

Environment: Strong trending markets that make new highs that then proceed to fail by taking out a recent low and then reverse again to make new highs
Strategy Rules:
Long Trade
1. Look for a currency pair that is making a 20-day high
2. Look for a pair to reverse over the next 3 days to make a 2-day low
3. Buy the pair if it takes out the 20-day high within 3 days of making the 2-day low
4. Place the initial stop a few pips below the original 2-day low that was identified in step 2
5. Protect any profits with a trailing stop or take profit by double the amount risked
Short Trade
1. Look for a currency pair that is making a 20-day low
2. Look for a pair to reverse over the next 3 days to make a 2-day high
3. Buy the pair if it takes out the 20-day low within 3 days of making the 2-day high
4. Place the initial stop a few pips above the original 2-day high that was identified in step 2
5. Protect any profits with a trailing stop or take profit by double the amount risked