Our sentiment-based breakout trading strategy (Breakout2) sold the Euro against the US Dollar, Australian Dollar, Japanese Yen, and Swiss Franc on yesterday’s breakdowns.
The system sold because each of the EURUSD, EURAUD, EURJPY, and EURCHF were breaking to their lowest lows of the preceding 24 hours AND our proprietary retail positioning indicator showed that the trading crowd was heavily long EUR. Below is a screenshot of the strategy dashboard available on DailyFX PLUS:
Source: DailyFX PLUS “Classic” Trading Signals, screenshot taken at time of writing
With the exception of the Euro/Swiss Franc pair, continued EUR weakness has made all of these Breakout2-based trades float unrealized gains through time of writing. Yesterday we noted via our weekly strategy outlook webinar that Euro shorts remained attractive as long as the EURUSD traded below $1.2880, and indeed it has.
Yet time cycle analysis suggests that the Euro is at a potentially critical juncture versus the US Dollar.
Sentiment-Based Breakout Strategy Sells Euro/US Dollar
The Breakout2 strategy trails a stop based on the 24-hour high or low. Since it entered a EURUSD short position at the 24h low, it will close it if the EURUSD breaks the 24h high—currently $1.2886. If it does indeed get stopped out, it may signal that the pair is trading above critical former support and may trade higher.
The Euro/Japanese Yen short position is at similar risk of getting stopped out as the pair bounces, as the 24-hour high in EURJPY stands less than 15 pips away. What does it all mean?
Trailing Stop Near as Breakout2 Remains Short Euro/Japanese Yen
These Euro-short positions seemed attractive yesterday as EUR pairs thundered through key support levels. Yet the failure to break to continued lows puts us at further risk of near-term bounces. Of the three EUR-short positions opened yesterday, one has been closed (EURCHF) and two are quite near getting stopped out at a very modest gain (EURUSD and EURJPY).
The fact that Euro pairs have not consistently fallen despite clearly bearish implications from the Cypriot financial crisis may serve as a warning in and of itself. If we fail to see a continued break lower it may be time to watch for short-term upside across EUR pairs.
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--- Written by David Rodriguez, Quantitative Strategist for DailyFX.com
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