From the December 01, 2008 issue of Futures Magazine • Subscribe!

Squeezebox strategy

One of the most successful trading strategies I found for markets is the Squeeze Box strategy. The Squeeze Box strategy anticipates breakouts though it does not indicate direction. It can work as a trend or countertrend strategy and is indicated when a pair is stuck in a range, the longer the better the signal.

There are two elements needed to set up this strategy, a consolidation of several moving averages near one point on a chart and a range bound currency pair. As shown in the attached chart, it does not matter what type of candles it produces or what time of the day it is. What is important is that all the moving averages you select are inside the box.

For this particular strategy, I use the 62- and 144-period exponential moving averages and the 200-period simple moving average. They must all be inside the box, all ‘squeezed’ together. The parameters of the top and bottom of the box is the high and low of the range the currency pair is trading in. As noted above, the longer the pair has been in a range, the stronger the signal. As long as the moving averages fit in the box, we have a set up. There is no one way of drawing the squeeze box. It can be redrawn and adjusted as necessary.

After the box is drawn, we wait for a candle to close outside of the box. It is important to wait for a close to avoid entering on a false trigger.

Once we take a position there are a couple of options for stop placement and profit targets. If the pair closes inside the box, I close the transaction. Alternately you can place the stop at a certain level, say half way, within the box. I prefer the first option, especially when trading a volatile pair like the GBP/JPY. It is always a good idea to use a maximum stop-loss target. Don’t allow the trade to go more than 1% against you, even if that requires a tighter stop than either of the first two options.

You can set your profit target at the lowest EMA used to make the box. In our example in the EUR/USD, we used the 62-hour EMA. If the pair crosses back above the 62-hour EMA the transaction is over. For the times that I want to be more conservative, I either use a 32- or 20-hour EMA. In our EUR/USD example, we get out much earlier using the 20-day EMA. Our profit is not as great but we have a lot less exposure to a reversal.

If a pair never touches a moving average, I use support and resistance levels as my profit target. At that moment you can decide to use a floating stop, or take 100% profit and move on.

My favorite time frame to apply the Squeeze Box to is the one-hour chart. You can use any time frame. However, the higher the time frame the stronger the break out.

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