Wavelet-Andean Structural Breakout
Family: breakout · Regime: trending · Complexity: high · Asset classes: FX, Equities, Crypto · Timeframes: H1, H4
Thesis
Market breakouts are most reliable when they occur in the direction of the low-frequency trend component (Wavelet) and are backed by expanding variance (Andean). By using the Daily High/Low as a liquidity boundary, we enter only when the market has cleared significant historical overhead/support, while the Volatility Ratio ensures we are not 'buying the top' of a volatility spike.
Components
- Discrete Wavelet Transform (DWT) (regime) — Acts as a low-pass filter to define the macro regime, removing high-frequency noise that typically causes false breakout signals.
- Andean Oscillator (direction) — Decomposes price variance into bullish/bearish components to confirm that the trend has sufficient 'energy' and is not just a low-volume drift.
- Daily High Low MTF (entry) — Provides objective market structure levels; a break of the previous day's extreme signifies a shift in institutional liquidity participation.
- Z-Score (exit) — Identifies price extremes (z > 2) for profit-taking or mean-reversion (z < 0) for early exit when a trend loses its statistical edge.
- Volatility Ratio (VR) (risk) — Dynamically adjusts the stop-loss distance and position size based on current price range expansion relative to historical norms.
- Stochastic Oscillator (confirmation) — Ensures the entry is not made at an exhausted momentum state (overbought/oversold) relative to the local window.
Known failure conditions
- The DWT signal lags significantly, causing entries at the very end of daily cycles.
- High-frequency 'whipsaw' regimes where price breaks the Daily High/Low but immediately mean-reverts before the Andean Signal can catch up.
- The Volatility Ratio remains below 1.0 for extended periods, leading to stops that are too tight for the underlying asset volatility.
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