Breakout After Failure

In Street Smarts, Larry Connors and Linda Raschke outline a trading pattern which they named Turtle Soup Plus One, a variation of their Turtle Soup pattern. Although the authors intended the pattern to be used on stocks, futures and commodities, the principles can be easily transferred to the Forex market. Let's look at the rules for Turtle Soup Plus One and find some Forex trades that highlight this powerful pattern. Turtle Soup can be traded in any time-frame, so let's take a look at a Forex swing trade.

Rules:

• The currency makes a new 20-day low. The previous 20-bar low must have been made at least three trading sessions earlier. The close of the new low (day one) must be at or below the previous 20-bar low.
  
• 2. An entry buy stop is placed the next day (day two) at the earlier 20-day low. If you are not filled on day two, the trade is cancelled.
  
• 3. If filled, place a protective sell stop one tick under the lower of the day-one low or the day-two low.
  
• 4. Take partial profits within two to six bars and trail a stop on the balance of your position.

In the first chart, we see that the British Pound was declining against the U.S. Dollar rapidly through the end of December. On 12/28 we see that the Pound made a new 20-day low, and the close was below the previous 20-day low's close, which happened to be a rally day. So, we put a buy order in for the next morning, with a stop one tick below the new 20-day low. The rules call for taking profits within two to six days, and on the fourth day of the trade, we see a massive bounce as the currency snaps back from the lows. Exit strategies can be tuned individually, but an easy one to remember is to take out 1/2 of your position, to ensure you have some profits locked in. Let the second half ride with a trailing stop, and leave this one for the books.

The rules are exactly the same for short sells, except that they are reversed. Instead of buying 20-day lows, you are selling 20-day highs. The Australian Dollar rallied through April into May before reaching a 20-day high on 5/11. The following morning we would place a sell order, with a stop one tick above the 20-day high. The currency tested resistance, but eventually gave up and closed down for the day. The following day, we see a large move down as price snaps back from the new highs. Here we would take some profit, letting those who can stomach wild swings hold on for the ride over the next few days. The currency declined for the rest of the month, and continued to for most of the next month as well.

So when a currency makes a new 20-day high/low, be alert for some type of correction. New highs become old highs and new lows become old lows. After reaching an extremity, price will often pullback, so be ready to capitalize on those moves.

John Patrick Lee
Associate Editor

johnl@tradingmarkets.com