Squeeze Break Retracement Forex Trading Strategy

0
1028
Squeeze Break Retracement Forex Trading Strategy

One of the types of market that traders are often presented with is a trending market condition. In fact, seasoned traders would often be looking for these types of market condition. Others even trade exclusively during trending markets and avoid trading during ranging markets. Knowing that, it is important that traders have a strategy to exploit trending market conditions.

Trending markets are usually much easier to trade compared to ranging markets. This is the reason why most traders love trading during trending markets. Trade direction is much easier to decipher whenever the trend is clear. This significantly increases the probability of a winning trade.

However, even though trending markets is theoretically much easier than other market conditions, many traders still find it difficult to trade profitably on a trending market. This is probably because most traders try to chase price instead of letting price go back for them.

The market consists of two phases, contraction and expansion phase. These phases are much more observable during trending markets. The market would rapidly rally to the direction of the trend, then suddenly the rally pauses. Volume and volatility go down and the market seems to have stopped moving. Then, volume and volatility suddenly spike, and the market starts to rally again to the direction of the trend. This is what typically happens during a trending market, the market expands and contracts again and again for a few times.

Traders who “chase” price usually trade during expansion phases. However, astute traders know that it is best to trade during contraction phases. It allows them to enter the market at a better price right before the market starts to rally.

The Squeeze Break Retracement Forex Trading Strategy trades on these contraction phases. It makes use of indicators that are specifically developed to detect these market phases.

sMAMA Indicator

The sMAMA indicator is a trend following indicating which is basically a customized adaptive moving average. The concept of an adaptive moving average was first introduced by John Ehler. He uses the MAMA and the FAMA moving averages, which has worked well. The sMAMA is based on these moving averages.

The sMAMA draws two lines, one being faster than the other. The faster line is colored blue while the slower line is colored red. The trend is interpreted as bullish whenever the blue line is above the red line. On the other hand, the market is considered bearish whenever the blue line is below the red line. Trend reversal signals are generated whenever the two lines crossover.

Squeeze Break Indicator

The Squeeze Break indicator is based on the John Carter’s strategy mentioned in his book, Mastering the Trade.

In his strategy, John Carter considers a market to be on a contraction phase whenever the Bollinger Bands are squeezed inside the Keltner Channels. He also considers the market to be on an expansion phase whenever the Bollinger Bands break out of the Keltner Channels. This idea is very logical since the Bollinger Bands have outer lines which are specifically designed to respond to volatility. These lines expand during a contraction phase and contract during a contraction phase. The Keltner Channels on the other hand is less responsive to volatility compared to the Bollinger Bands. This makes using the two indicators in this manner very ideal for detecting expansion and contraction phases.

The Squeeze Break indicator displays expansion and contraction through histogram bars. Long positive bars indicate that the Bollinger Bands have broken out of the Keltner Channel, indicating that the market is on an expansion phase. Negative bars are printed when the Bollinger Bands have contracted inside the Keltner Channel, which indicates that the market has already contracted.

The Squeeze Break indicator also has a blue oscillating line which mimics the movement of price. This line is used to indicate trend direction. The trend is considered bearish when the line is below zero and bullish when the line is above zero. Crossovers on the zero mark indicate a trend reversal signal.

Trading Strategy

This strategy trades during a contraction phase of a trending market. On a trending market, contraction phases usually occur as a retracement. This allows traders to enter at a better price just before the market starts to expand.

To detect the trend direction, we will be using a 50-period Simple Moving Average (SMA). Trends will be based on the slope of the 50 SMA and the location of price in relation to the 50 SMA.

Then, we will be judging whether the market is contracting or not using the Squeeze Break indicator. The market will be considered as contracting whenever the histogram bars are considerably smaller or better yet are negative.

Contraction phases should also be accompanied by a retracement. Price is considered to have retraced if the sMAMA crosses over to the direction of the 50 SMA.

Trade entry signals are generated on the confluence of the crossing over of the sMAMA and the crossing of the Squeeze Break indicator’s blue line over zero indicating the direction of the main trend based on the 50 SMA.

Indicators:

  • sMAMA
  • Squeeze_Break

Preferred Time Frame: 15-minutes, 30-minutes, 1-hour, 4-hour and daily charts

Currency Pairs: major and minor pairs

Trading Session: Tokyo, London and New York

Buy Trade Setup

Entry

  • Price should be above the 50 SMA line.
  • The 50 SMA line should be sloping up indicating a bullish trend.
  • The market should contract causing the Squeeze Break histogram bars to become smaller or cross below zero.
  • Price should retrace causing the sMAMA blue line to temporarily cross below the red line.
  • The Squeeze Break indicator’s blue line should cross back above zero indicating a bullish trend reversal.
  • The sMAMA’s blue line should cross back above the red line indicating a bullish trend reversal.
  • The bullish trend reversal signals should be closely aligned.
  • Enter a buy order on the confluence of the above conditions.

Stop Loss

  • Set the stop loss on the support level below the entry candle.

Exit

  • Close the trade as soon as the sMAMA’s blue line crosses below the red line.
  • Close the trade as soon as the Squeeze Break’s blue crosses below zero.

Squeeze Break Retracement Forex Trading Strategy

Squeeze Break Retracement Forex Trading Strategy -2

Sell Trade Setup

Entry

  • Price should be below the 50 SMA line.
  • The 50 SMA line should be sloping down indicating a bearish trend.
  • The market should contract causing the Squeeze Break histogram bars to become smaller or cross below zero.
  • Price should retrace causing the sMAMA blue line to temporarily cross above the red line.
  • The Squeeze Break indicator’s blue line should cross back below zero indicating a bearish trend reversal.
  • The sMAMA’s blue line should cross back below the red line indicating a bearish trend reversal.
  • The bearish trend reversal signals should be closely aligned.
  • Enter a sell order on the confluence of the above conditions.

Stop Loss

  • Set the stop loss on the resistance level above the entry candle.

Exit

  • Close the trade as soon as the sMAMA’s blue line crosses above the red line.
  • Close the trade as soon as the Squeeze Break’s blue crosses above zero.

Squeeze Break Retracement Forex Trading Strategy -3

Squeeze Break Retracement Forex Trading Strategy -4

Conclusion

This strategy works really well during a trending market condition. Traders could use this strategy as soon as they detect a trending market which respects the 50 SMA line.

This strategy is great for day traders trading on 15-minute charts up to 1-hour charts or swing traders trading on the 4-hour chart or the daily chart. It could also work on lower timeframes, however there may be some whipsaws that may prematurely hit stop losses.

The key to trading this strategy successfully is in identifying trends. It is also best to trade on fresh trends and avoid overextended trends. Trends that have retraced for more than three times is more likely to reverse rather than continue to trend. In this case, it is best to avoid trading this strategy.

Recommended MT4 Brokers

XM Broker

  • Free $50 To Start Trading Instantly! (Withdraw-able Profit)
  • Deposit Bonus up to $5,000
  • Unlimited Loyalty Program
  • Award Winning Forex Broker
  • Additional Exclusive Bonuses Throughout The Year

XM broker

>> Sign Up for XM Broker Account here <<

FBS Broker

  • Trade 100 Bonus: Free $100 to kickstart your trading journey!
  • 100% Deposit Bonus: Double your deposit up to $10,000 and trade with enhanced capital.
  • Leverage up to 1:3000: Maximizing potential profits with one of the highest leverage options available.
  • ‘Best Customer Service Broker Asia’ Award: Recognized excellence in customer support and service.
  • Seasonal Promotions: Enjoy a variety of exclusive bonuses and promotional offers all year round.

fbs broker

>> Sign Up for FBS Broker Account here <<

Click here below to download:

Save

Save



Get Download Access

Get Smarter About Forex Trading Using Indicators

Join 100,000+ subscribers and get our 5 min daily newsletter on what matters in forex.

We do not sell or share your information with anyone.

LEAVE A REPLY

Please enter your comment!
Please enter your name here