“Breakout trading” – picking the strategy to suit the times
I know we all claim that the very nature of the FX market has been changed radically by the dominance of the Algos but in truth, there have been multiple periods over the last 3 decades when we have ‘enjoyed’ similar market conditions. The market has tended to move reasonable swiftly between levels and then finds a consolidation range which it is comfortable in for an extended period of time before going on another 2% move. Even the volatile GBP has been trading like this to a large extent, albeit the time frames between consolidations are extremely variable.
I have just been analysing 1 very clever strategy which has been taking advantage of these moves on quite a short-term basis. I have permission to give some broad details as the IP lies in the finer points particularly around position sizing and pair selection.
The strategy waits for a minimum 1.4% breakout move before placing a counter-trend position and then trying to estimate the 50-70 pip consolidation range. Position sizes increase during the consolidation timeframe and the system then sets itself for the next breakout move.
The logic being that we don’t know which way the market is going to move but when it does move, we can make an educated guess as to how it will behave. Simple is often best.