Mexican Peso: Bullish Breakout (Revision 3)

There is a potential bullish ABCD pattern, which closely resembles a flag pattern, developing in the Mexican Peso. This pattern is bullish because of the retracement, which is less than 50%. Anything less than 50% is bullish.  The trigger to this pattern is a break above .05025 before going below .04901. If prices can trigger this pattern by August 2nd, then we would have right-handed skewing as well. The skewing shows the momentum, which in this case would be strong. Weak momentum would be skewed to the left (i.e., less bars down to the swing low, and more bars to the breakout high).  The next step is to watch how price moves towards and above the breakout level on a smaller time frame (i.e. 240 min).  So far there are 2 ABCD patterns on this time frame.  Both have deeper than 50% retracements, which signals a weak up trend.  So we have some conflicting signals between the daily and intraday time frames.  These breakout patterns work best when both time frames are in sync.  However, the daily time frame does carry more weight.  Therefore, I anticipate a breakout on the daily time frame that could stall near recent highs (0.05074 to 0.05100).  Then I expect a pullback back to or slightly below the breakout area.  This could offer a nice entry because there is a volume at price cluster developing as price action has been in potential accumulation mode the past few weeks.

Set-up 1:

Buy the breakout at 0.05026, with stops at 0.04900 for a risk of 630.00/futures contract.  The target of this ABCD pattern would be 0.05156 for a reward of 650.00/futures contract.

Set-up 2:

Don’t buy the breakout.  Instead, wait for a potential pullback into the volume at price cluster.  This will lower your risk and increase your reward to risk ratio.  I will give more details on this trade in a follow-up post.  The stop and target would still be the same.

Lastly, we do have some possible upside obstacles that could serve as potential scale out levels before reaching the target zone. The first is between 0.05074 and 0.05100. This zone contains the swing highs from 12-9-20, 1-21-21, and 6-9-21. The next possible scale out would be 0.05123, which is July’s monthly R1 pivot.

Stay tuned for more analysis on this potential breakout.

Trading System Drawdowns

Drawdowns are a loss of capital after a series of losing trades.  They are calculated using equity curve peaks and troughs.  New equity curve highs will reset them.  You can calculate them as dollar amounts and/or percentages.  Both come in handy and are essential to monitoring a trading system.  Some rules of thumb for maximum drawdowns are 50% of equity or 50% of best yearly performance. The other important component is the time it takes to recoup a drawdown.  This is measured from peak to new peak.  Whether you are a trader or an investor, drawdowns are inevitable.  When one does occur, it's important to put the percentage and days into context.  Is the current percentage within the range of previous years? Or is it the biggest one for your trading system? Is it near the maximum allowed? Is the length of the drawdown within the range of previous years? Or is it currently the longest one for your trading system?

The reason I'm writing this article is because my 3-tiered trading system recently went through a larger than normal drawdown.  My conservative fund dipped 12.93%, my moderate fund dipped 13.23%, and my aggressive fund dipped 12.50%.  This system has been trading in simulation since January 2019 and these dips were the systems’ largest to date.  Was this the start of a trading system failure? Should I lose faith in it and stop trading? That's where the statistics come in handy.  Even though they were experiencing their largest declines, they didn't check one of two boxes for maximum drawdowns.  First, did it reach 50% of equity? No.  Second, did it reach 50% of best yearly performance? I had to look back to 2019 and the answer was no.  The 2019 returns were 57.61% for the conservative fund, 60.25% for the moderate fund, and 54.17% for the aggressive fund.  The drawdown levels to watch would be 28.81%, 30.13%, and 27.09%, respectively.  Luckily, I stuck with my system and all 3 funds recently made new equity curve highs.  BTW, all are also in the top 10% of all funds traded at Collective2.

The use of drawdown statistics can help prevent you from pulling your invested money too soon or from you losing faith in your own trading system.  Remember that next time you find yourself in a drawdown as either a trader or an investor.