RLS Adaptive Liquidity Sweep Breakout
Family: breakout · Regime: trending · Complexity: high · Asset classes: Equities (Indices), Major FX Pairs · Timeframes: M5, M15
Thesis
The New York open provides the highest daily liquidity, allowing institutions to 'sweep' stop-losses at previous day's extremes to build positions. By using an adaptive RLS filter to ensure the medium-term trend is aligned and checking cross-market stress via a Macro Dashboard, we can identify high-probability breakouts of the previous day's range. The edge exists because retail 'stops' at previous day highs/lows provide the necessary liquidity for institutional trend continuation, confirmed by unusual relative volume (RVOL).
Components
- Recursive Least Squares Adaptive Filter (RLS) (regime) — Used as the primary regime filter to ensure trades are taken only in the direction of the adaptive trend with minimal lag compared to traditional EMAs.
- The Daily Sweep (direction) — Provides directional bias by identifying liquidity grabs (sweeps) and Fair Value Gaps (FVG) specifically during the high-volatility New York open.
- Daily High Low (entry) — Acts as the mechanical trigger level; we enter once price breaks the prior day's high/low after a sweep has occurred.
- Pivot Points (Classic) (exit) — Provides objective, non-repainting mathematical targets for profit-taking based on prior volatility.
- Macro Risk Dashboard v8.2 (risk) — Dynamically adjusts position sizing and stop-loss width based on aggregate cross-market stress and volatility Z-scores.
- RVOL (Relative Volume) (confirmation) — Ensures the breakout is backed by institutional participation rather than low-liquidity noise.
Known failure conditions
- RLS Filter oscillates (whipsaws) in a tight range, indicating the forgetting factor is too high for current volatility.
- Macro Risk Dashboard shows high risk scores (>80th percentile) while price breaks out, suggesting a 'crash-up' or liquidity vacuum move.
- Breakouts consistently fail to reach R1/S1 pivots despite high RVOL, suggesting absorption by larger counter-trend participants.
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