Adapting to Current Market Conditions: Breakout Correlations

In this highly volatile market, markets move differently from normal. At this moment, markets are so volatile and at times unpredictable because of the current credit crisis. As a result, support and resistance lines are not always as successful as they normally are because of the impact of fundamentals.

Also because we have not seen these price levels for many years it’s hard to place good support and resistance lines. So for these reasons I started looking at ways to adapt my method to try and reduce the risk of bad trades or unsuccessful line breaks. Therefore, I started to look at ways to try and decide what would make a line break more successful and try to target more pips, as the moves across the pairs have been larger than normal.

You know that I only trade 1 pair, GBP/JPY but after talking with another trader from the site, Laurynite, she showed me how she has adapted my method. She looks at a number of pairs, mainly GBP/USD, EUR/USD, USD/JPY, EUR/JPY as well as GBP/JPY on the 1hr time frame. She uses support and resistance lines along with scalp lines. She also adds trend lines and looks at how pairs move in relation to each other: the correlations between the different currency pairs.

Currently, these currency pairs seem to be moving in the same direction more than they were before the financial crisis. Using the correlations between these currency pairs is a way to increase the chances of successful trades, using my method.

I have included a few examples to show that looking at similarities between the currency moves can reduce your risk and add to your pip total. I am not suggesting you start trading multiple currencies!! I am simply showing a way to increase the likelihood of a successful trade and grab more pips than in a normal move. I still trade the 4hr timeframe I’m just experimenting with this just now.

Example 1: GBP/JPY December 1st 2008

As you can see from these charts, a wedge developed across the pairs mentioned. There was a scalp line above and below the wedge formation. As I do not normally trade trend lines I was waiting for a break of either scalp line. As you know, I do not try and anticipate what will happen, I trade what actually happens. First, the wedge broke on EUR/JPY and EUR/USD to the downside. This was an indication that it was highly likely that GBP/JPY would also break to the downside. However, I waited until the break of the scalp at 145.54, in-keeping with my method, for a confirmation of a trade entry. When price broke this scalp line it fell to 141.00 before the first signs of a potential reversal. That’s over 450 pips!!!

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EUR/USD
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EUR/JPY
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GBP/USD
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USD/JPY
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GBP/JPY
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Example 2: GBP/JPY December 8th 2008

As you can see from the charts below, a master candle developed over the same pairs. Furious Angel showed me master candles a while ago and also talks about them on the site. For those that have not heard of master candles please read the previous article.

These master candles developed on a Friday in the last few candles of the week. They then broke across the board either Sunday night or early Monday morning. Again, I would only have traded the GBP/JPY break of the master candle but looking across the pairs gave me a good indication of what was going to happen.

GBP/JPY broke the high of the master candle at 137.50 and moved to a high of 140.73 before reversing. This was a move worth over 300 pips with only a stop loss of less than 40 pips required.

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EUR/USD
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EUR/JPY
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GBP/USD
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USD/JPY
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GBP/JPY
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Summary

I want to make clear that I have not changed my method I have simply adapted it to deal with the current mess of the credit crisis. Once it has passed I anticipate the markets will return to normal, as will the way I trade.

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