What is the Squeeze

Before I get into what "the Squeeze" is, I want to thank everyone that has sent positive comments about the website. (I’d equally appreciate negative comments as well)  I’m glad it has been able to help you in your quest to become a Forex trader.  In addition, the visitor traffic to the site has been improving by the day which motivates me more to post worthwhile content.

The Squeeze is actually a pretty cool setup that can be used for both day trading and swing trading.  Some of you may have already heard about it from John Carter’s website, "Trade the Markets." The Squeeze particularly takes advantage of quiet periods in the market when volatility has decreased.

John Carter has turned The Squeeze into an indicator but it isn’t free.  You can create the indicator yourself if you have Bollinger Bands, Keltner Channels, and any momentum index oscillator.   The real disadvantage is that you have increased the number of indicators on your charts and if anyone has seen a Keltner Channel before, it’s not easy on the eyes.  Whereas Bollinger Bands are smooth, the Keltner Channel is jagged.  You can use the default setting for both of these indicators and a 12-period for your momentum oscillator.  The oscillator is used to indicate whether you will go long or short.  [Continue reading by clicking Read More]

When volatility is decreasing, the Bollinger bands will narrow and actually trade inside the Keltner channel.  Here is an example of it happening now on the EUR/USD 30 minute chart:

You see the white lines (Bollinger Bands) inside the blue lines (Keltner channel) starting at above 10 bars from the right. 

This indicates decreased volatility.  Your waiting for the market to build up steam and explode.   On the last bar, you can see the Bollinger Bands move outside the Keltner Channel.  You would now consult your momentum oscillator to see whether you should go short or long.  Here is the chart with MACD attached:

 
The MACD shows that momentum is up therefore you would go long on the EUR/USD at about 1.2068.

John Carter places the following money management stops:

If the stop is near a key price support or resistance level, this is taken into consideration.  For forex swing plays and position trades (taken off the daily chart), he used a 100 pip stop.  His target is based purely on the momentum of the trade.  Once the momentum index signal starts to weaken, he gets out of the trade.  He does not trail stops. 

It’s an interesting setup, one that might be worth looking into. 

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