Forex Trading System- Breakout Analysis

OVERVIEW

Breakouts, or very sharp price movements in one direction or the other, appear as elon-gated vertical columns in P&F charts. For example, in Figure 18.1 there is a 14-box up-ward breakout in column 5 and a 13-box downward breakout in column 10.Some P&F analysts have also aptly dubbed these features “walls” or “poles.”

PRECEDING COLUMNS

Our objective is to catalog which price patterns immediately precede a breakout and todetermine their respective percentages of occurrence. In the analysis that follows, weagain consult our 7,000,000+ EURUSD database and we employ a three-box reversalamount in all cases.

Specifically, we map the frequencies of occurrence of every four-column pattern pre-ceding the vertical column that contains nine or more boxes of either Xs or Os. Inverse pat-terns are summed together. For example a sequence of, three Xs, four Os, five Xs, and sixOs is represented the same way as three Os, four Xs, five Os, and six Xs except that the suc-ceeding breakout occurs is the opposite direction. (See Figures 18.2 through 18.4.)

SUCCEEDING COLUMNS

Knowing which patterns will most likely follow a breakout can be just as important asknowing its preceding patterns. In the following analysis, we catalog the four-column pat-terns that immediately follow a nine or more box breakout. In all cases we use a three-boxreversal amount for box sizes of one, two, and three pips. (See Figures 18.5 through 18.7.)

OBSERVATIONS

While scrutinizing the four-column patterns, we noticed a very high frequency of doubletops preceding an upward breakout, as shown in the rightmost column in Table 18.1.
The column headers refer to the highest X in the first column of the predecessorcharts and its horizontal relationship with the highest X in the third column of the pre-decessor charts. Essentially, this study in breakout analysis simply confirms the validityof the buy and sell signals already discussed in Chapter 14, “Double Tops and Bottoms.”

We also calculated the average number of boxes in each column by multiplying theelements of each pattern by their frequencies, then dividing by the total number of oc-currences. The average four-column predecessor pattern was 3344 while the averagesuccessor pattern was 3343.

We intend to continue our analysis of breakouts by using different currency pairsand different time frames. We have only touched the tip of the iceberg in the current in-troductory study.