Akuma99 Squeezer

Hi all,

Hope all is well and your trading week has been a successful one. I thought I would try to get your ideas on finalising a simple trading strategy I want to share with my readers at beginnertrader, using a custom indicator called the bollinger squeeze.

I lay no claim to programming the indicator, although I am quite familiar with the method. It is a visual representation of a method involving Keltner channels and Bollinger bands. The most common method is whenever a 20 period bollinger bands move inside the 10 period keltner channels, you have a head start that a move is about to happen.

I looked into that theory, and it has some merit, but misses an awful lot of consolidation periods leading up to a big move. So after many months of tweaking timeframes and settings, I found that actually 12 period bollinger bands moving inside 6 period keltner channels on a 1H timeframe is more accurate.

I look at the market as a game (I know it is not a game) of probability, and despite many traders misconceptions, the market moves sideways more than it does up or down. If we can eliminate the sideways periods, and only trade when there is a good chance of a move up or down, we have already improved our odds.

Of course with periods of greater volatility, comes greater chance of being shaken out of an otherwise good trade, but overally the benefits out-weigh the negatives.

SO .. to the point, I trade this indicator, and during blue periods, look for chart pattern breakouts (triangles, pennants, rectangles, wedges etc.) and it has proven successful enough, however I thought I would send it out there to the masses for ideas on picking likely directions and money management tips (the foundation of any good trading system).

Below is the GBPUSD 1H chart as of time of writing, the blue dots let you know when something is about to happen (ignore the histogram for now) and attached is my version of the indicator, the histogram is something I do not use, but I have left it in there anyway for now.

http://img126.imageshack.us/img126/2130/gbpusd25gl.gif

Happy trading!
Akuma99

Just for those who use VT visual trader and would like to participate in this thread. I coded this up sometime ago so I will posted it here for anyone who wants it.

Thanks -- I use VT and have put it on my charts -- will let you know how it goes.

Kiwigold

Claude... on your screen shot you have two lines red and blue.. what kind of indicator is that? where can i get it.. or if you have it for MT4 can u share it with us?
Thanks .

Thanks for that Claude .. keen to hear what we all think.

Hello Neznaika

The red and blue line on the chart are just a built-in functionality of VT charging.
They are, but the high and the low of the day nothing more.

I never think of turning them off when I post a picture.

Thank you Akuma99 for providing this strategy and code.

I heard this strategy before and personally think it works. I like the concept that this strategy trades break-outs. When market is slow, we get ready; when a break out occurs, we trigger and get into the fast moving train.

I manually did some backtesting before with the setting parameters of 10 for Keltner Channel and 20 for Bollinger Bands and found very satisfactory results. Since I didn't try other parameter settings, it is kind of you to provide me with a more optimal setting of 6 and 12. Another problem with this method to me is that I have to stare at the screen to see the point where BB breaks KC, and this is really tough. I am definitely going to try your code because it simplies things so much.

As for the histogram, I think it's an indicator of whether we go long or short. If it's above 0, we go long; if it's below 0, we go short.

Also I think setting a trailing stop with 30 pips would be a good idea to this strategy. And I am still trying to figure out the best exit point. Any discussions on this would be appreciated. Thank you.

Hello,
Here is a video on some ways that you can use the Squeeze indicator.

Video

Thanks rongshihong for the kind words, there is certainly plenty of potential in using this method, and it has served me well so far. The histogram is indeed intended to provide an indication on direction, as shown in the video link posted by avlasov, some interpret a valid signal to be when a red dot appears after a blue dot, however in a years worth of backtesting, waiting for this to confirm means you miss the majority of the move, especially on an intraday basis.

Personally I have found the histogram to be no better than a random choice of direction.

In terms of exit strategies, I like to use fibonacci extensions, setting a target at the 161.8 extension and leaving my stop sitting behind some congestion price action. I do this as the squeeze get's you into quick moving and volatile times, which means an aggressive trailing stop quite often gets you wiggled out of a trade way too early. Below is an example from last weeks EUR/USD 1H charts.

I have color coded the entry and corresponding exit points, the safe exit is the 161.8 fib extension, but if you are able to monitor it, you can lock in your profits and go for the alternate exit, which is the 261.8 fib ext. Of course the below assumes you have picked the direction correctly and the other blue dots not labelled as entry are valid also, and most reached their first exit point, I just couldn't fit all the lines and labels on the chart

http://img87.imageshack.us/img87/4819/eurusd4fm.gif

Akuma99, are you saying that instead of using a red dot after a blue dot as the entry signal, you would rather look for special reversal patterns and enter during the blue dots?

Well it is partly what this thread is intended for, to refine entry and exits based on the signals these parameters generate. In general I take a blue signal as a sign to me to look for a reason to trade, as long as we are still in a blue period, or just after, whether that be a reversal or continuation pattern, it just so happens that the major moves in this screen shot tend to be reversals, but of course in some cases they are also continuations of the current trend, otherwise I would be writing this somewhere in the bahamas

Below is the same screenshot, this time with some reversal candlestick formations highlighted around the blue periods, of course these are easy to spot in hindsight, trend line break analysis would also have generated the same results although with slightly later entries, again easy in hindsight.

http://img83.imageshack.us/img83/2661/eurusd5nb.gif

Just to show a real-time trade, here is this mornings EUR/JPY currently in a blue zone, which way would you trade it? (I am short at 143.70).

http://img124.imageshack.us/img124/3087/eurjpy3rd.gif

Just to follow the above up post from this morning ... here is what happened ..

http://img82.imageshack.us/img82/9650/eurjpy8px.gif

Surprised by the sharp spikes on the US open? ... squeezer wasn't (blue dots indicate an impending move):

http://img145.imageshack.us/img145/1752/usdjpy5lx.gif


and to show it works on crosses also:

http://img145.imageshack.us/img145/1268/eurgbp2tp.gif

Hi Akuma99,

intersting system
Would it also work on i.e. 4H charts and others?

Thanks buddy,

FT

The signals are pretty good from 1H and above, below the 1H I found to be a little less reliable although still pretty good. As an example, here is the current 4H charts on the USDCHF and USDJPY (EURUSD and GBPUSD show similiar results)

http://img206.imageshack.us/img206/4283/usdchf2gg.gif

http://img206.imageshack.us/img206/6691/usdjpy4xy.gif

Very nice analysis. It seems that this method gives very accurate predictions on breakouts. And also it seems that the longer the timeframe, the more accurate the predictions are.

One issue I have been thinking about this strategy is how to efficiently catch the move. You are right, we shouldn't wait for the red light because that will usually be too late, but how to determine the direction of the move before the move actually occurs is a problem that I consider during the past few days. What I came out with is to set 2 stop orders in opposite directions. From the 4 hour graph above it is evident to see that during blue light periods there are usually some typical pattern which implies a potential breakout. Such patterns include triangle, rectangle, flag(I am not a pattern guru so excuse me if I say them incorrectly). What I mean is to set 2 orders at the breakout of the pattern, so that we don't really need to worry about the direction. And it seems that whipsaws rarely happen in this method, which is really a good thing to see. Once one order is triggered, we just cancel the opposite one and let the profit run with the move.

Nice reply there rongshihong, and you are right, the longer the timeframe USUALLY the more reliable, but the less signals (not such a bad thing really). Blue light periods as you call them are signs of congestion, which result in congestion patterns like you say, the most common in my experience being rectangles, penants and wedges.

Trading the top and bottom of the patterns is a very reasonable strategy, in fact it is how I trade it myself, however limit orders can be dangerous, especially in patterns like triangles, as the slope of an upper or lower line can change as the pattern develops. I prefer to trade closes above and beyond rather than just touches.

Hi akuma,

Pretty nice article about the bollinger squeeze here:
http://www.beginnertrader.com/?p=212

Thanks for sharing.
Actually, this is the first time I heard about this indicator and I very much like the logic behind it. But like you've said, it's only an indicator and not a system.. Hope you'll update and share with us if ever you'll be able to come up with a complete system..

Anyway, this indicator is on my list to take into consideration later...

Thanks for the kind words on the article eastmaels, the squeeze is the mainstay of my trading system. The way I look at a system is it should provide information on market mood, momentum, volatility, underlying trend, trend strength and market conditions.

The bollinger squeeze is my solution for market mood, with the blue zones telling me when the market is in a depressed or subdued mood. As I trade these times, momentum is non-existant in the short term so MMA tend to give me an idea on underlying momentum and strength, while price patterns give me a hint on expected direction. I am experimenting more with the 50CCI though to help me out there.

I will re-post a screenshot of my chart from another thread in the journal section to help you get an idea:

http://img414.imageshack.us/img414/8531/gbpusd7ev.gif


Ill be sure to post more if I discover anything new .. as I hope others will

P.S. I wish I could change the topic of the thread as it seems somewhat un-just considering I did nothing to develop the indicator itself.