Trading the Euro: Box it, Squeeze it, Love it, Leave it

By John Carter

Trading is the most deceptive profession in the world. A person cannot walk into an airport, jump into a 747, and take off down the runway without any prior training. Yet people will routinely open an account and start trading without any guidance whatsoever. For me, the biggest difference in my trading occurred when I learned to ignore my brain and just focus on a handful of good setups. Once I learned the setups, the next challenge was to have the discipline to follow them the same way, each and every time. No thinking, no hemming, no hawing. I did this by recording my trading activity and grading myself on how well I executed each setup . . . instead of how much money I was making or losing. Whereas focusing on the P&L automatically encourages the bad habits that plague many traders, a setup-based approach encourages habits that can push a trader into the realm of consistent profitability. Which setups do I like? Although I spend a large amount of my trading day focused on the Emini S&Ps and the Mini-Sized Dow, there are plenty of times when these indexes are dead in the water. On days when the indexes are trading in a range that is narrower than Paris Hilton's outlook on life, I look to the online currency trading for my next setup. My two favorite setups in the online currency trading are what I call the Box Play and Squeeze Play. While online currency trading, I execute these primarily on the EURUSD, but they work on all currency pairs.

I like to focus part of my trading day on scalp plays, where I'm jumping in and out of the market with a little piece here, and a little piece there. However, I also like to focus a part of my time on catching potentially bigger intraday moves, as well as multi-day and multi-week moves. What I'll do is focus on scalp plays in one account, and use a second account for swing plays. The Box Play and Squeeze Play are diverse setups that can be used for both scalp plays and swing trades. For intraday trades, I use 5 and 15 minute charts. For swing trades, I use 60 minute and daily charts.

Online Currency Trading Box Plays: Measuring the Move Before it Occurs

The one thing a trader soon learns about the markets is that they will never move straight up or straight down forever. A market can definitely rip higher for long time, but at some point it will have to rest and consolidate, and sometimes it will even come back down to earth and reverse all of those spectacular gains. Just as a runner can only sprint for a limited amount of time before their body gives out, a market can only move so far before it needs to pause, take a rest, and build up its energy reserves for the next major move.

For Box Plays, what I'm looking for is a market that is taking a rest before its next spurt higher or lower. I want to see a period of horizontal consolidation with at least two tests of the highs and two tests of the lows. Once I get these two tests, then I'm looking to buy a breakout of the box, or sell a breakdown of the box. My target on these trades is the width of the box. These plays can be done on all time frames, though my preference for day trading is 5 and 15 minute time frames. For swing trades, a trader can look to the 60 minute and daily charts. I trade these as both swing and intraday plays, with each time frame independent of itself (meaning I could have a 60 minute box play going and a 5 minute box play going at the same time, with different parameters and in different directions). Also, since the Euro actively trades around the clock, these box plays can be setup at anytime. I like to try to get some sleep each night, but on those nights when I get shafted by the wait staff (i.e., I order decaf coffee after dinner but they give me caffeinated, so I end up lying in bed staring at the ceiling), I can at least get up and check if a box play is forming overnight.

ONLINE CURRENCY TRADING RULES FOR BUYS (SELLS ARE REVERSED)

1. Set up a 24 hour chart so the overnight activity can be accounted for in this indicator setup.
2. I like to set up a simple bar chart on the time frame I want to play, without any other trading softwareor "junk" cluttering up the screen. I will search through various time frames to see where box plays are currently setting up.
3. As the market action progresses, I will take a horizontal line and start marking highs and lows. I will usually have to adjust this horizontal line a few times as the market action develops. Once I get two tests of one of the lines, I have a potential box play developing.
4. At this point I am watching to see if I get another test on the opposite side of the box. Let's assume in this example that I do, and now I have two tests of the highs, and two tests of the lows. The width of the box is 20 ticks.
5. Now that I have my box, I place two orders. I place a buy stop order 1 tick above the high end of the box. I place a sell stop order 1 tick below the low of the box. Whichever way the market breaks, I am sitting there with my order waiting to get filled.
6. My buy stop is hit. I place a limit sell order 20 ticks (the width of the box) away from my entry point. I leave my sell stop in place, as this now becomes my stop loss order on this trade. This represents a risk reward ratio a little over 1:1.
7. I stay in my play until my stop or my target is hit. I do not trail stops.
8. Note that all times listed are Eastern.

Figure 1 EURUSD Forex: December 2004

Figure 1 EURUSD Forex: December 2004

1. This is a daily online currency trading chart of the EURUSD. This is an example of a swing trade and a bigger example of the "power of the box." On May 20 and May 21 we form the lows at 1.1620.
2. On May 27 the market loses steam from its vault higher and sells off, forming the highs of the box 312 pips later (a little over 3 cents).
3. On June 4 and June 5 the market retests the lows of the box.
4. And on June 16 there is a retest of the highs of the box. Once this happens, I place my orders. I use a buy stop at 1.1933 and a sell stop at 1.1619.
5. My sell stop is hit at 1.1619. Since the width of the box is 312 pips, I calculate my target accordingly, and I place a buy limit order at 1.1307. My stop is my original buy stop order at 1.1933.
6. The market moves down nicely, and then shoots back higher. Anyone using a trailing stop for this online currency trading trade would have been stopped out for a small gain. The reason I keep my stop wider, and the reason I do not trail it, is that I know this is a high probability play, and I want to give this setup "room to move" in order to give it a chance to work out. My target is hit nearly 2 weeks later for a gain of 312 pips, or $3,120.00 per contract.

Figure 2 EURUSD ForexDecember 2004

Figure 2 EURUSD ForexDecember 2004

1. 1. On August 3 The online currency trading Euro formed a box on the 15 minute charts. The first high was marked here at point #1.
2. 2. A few hours later we get a potential low for the box, and I initially draw a horizontal line at the lows here.
3. 3. The market bounces and we get a retest of the highs.
4. 4. Then the online currency trading Euro sells off nicely and we get a retest of the lows. Since this low pushed a little lower than the low at point #2, I go ahead and move my horizontal line down to reflect this low. Once I have these lines setup, I place my orders. I use a buy stop at 1.2062 (one pip above the highs) and a sell stop at 1.2042 (one pip below the lows).
5. 5. My sell stop is hit at 1.2042. Since the width of the box is 18 pips, I calculate my target and I place a limit buy order at 1.2024. My stop is my original buy stop order at 1.2062.
6. 6. My target is hit and I'm out for a gain of 18 pips, or $180.00 per contract. I dont have to remember to cancel my open buy stop because my execution software does it for me automatically. Now, if I could just automatically remember to compliment my wife's choice of clothing each and every day, I will be good to go.

Figure 3 EURUSD Forex: December 2004

Figure 3 EURUSD Forex: December 2004

1. 1. On this 15 minute chart of the online currency trading EURUSD we get a first test of the highs at 1.2347. Once the market sells off from this level, I draw a horizontal line across the high.
2. 2. The online currency trading market sells off and pushes as low as 1.2323. I start off drawing a line at this level. Later I move this line back up to 1.2331 because the rest of the price support tests were much close to this level than the "wayward tick."
3. 3. Here we get another test near the highs.
4. 4. And here we get another test near the lows. Once the 4 price tests are complete, I place a buy stop order at 1.2348, and a sell stop order at 1.2330. Although this box isn't perfect, there is no doubt that we have a nice horizontal channel in place.
5. 5. My online currency trading buy stop order is hit. Since the width of the box is 16 pips, I place a sell limit order for my target at 1.2364. My sell stop remains in place as my stop on this play.
6. 6. My online currency trading target is hit, and I'm out for 16 pips, a gain of $160.00 per contract. I could have also used the low of the "wayward tick" in my calculations and this would have been a more profitable trade. The bottom line is that when it comes down to a few ticks, it is not a big deal where you place your horizontal line, as long as it is crystal clear that a box is in place. As one of my former mentors hammered into me, "Don't be a weenie for a teenie."

I always enjoy the act of opening and giving presents over the holidays in online currency trading. I find that I enjoy that feeling almost as much as discovering a new "box" to open up in the online currency trading Euro. With this play, Christmas seems to happen a few times each week instead of just once a year. Let's take a look at the next setup.

Online Currency Trading Squeeze Plays: Jumping on the Train Just as it is Leaving the Station

The online currency trading Squeeze Play takes advantage of "quiet periods" in the online currency trading market when the volatility has decreased significantly, and the market is building up energy for its next major move higher or lower. These quiet periods are identified when the Bollinger Bands narrow in width to the point they are trading inside the Keltner Channels. This marks a period of reduced volatility and signals that the online currency trading market is taking a breather, building up steam for its next move. The trade signal occurs when the Bollinger Bands then move back outside the Keltner Channels. I use a 12 period Momentum Oscillator to determine whether to go long or short. If it is above zero when this happens, I go long, if it is below zero, I go short. These are all canned studies that come with most charting packages. For the parameters, I just use the default settings on TradeStation. I also took an extra step and turned all of these into an indicator which makes it easier to read on the chart.

ONLINE CURRENCY TRADING RULES FOR BUYS (SELLS ARE REVERSED)

1. 1. Set up a 24 hour online currency trading chart so the overnight activity can be accounted for in this indicator setup.
2. 2. The "heads up" on this online currency trading setup is the first black dot. This is not a trade signal, but a "heads up" that a trade signal is setting up.
3. 3. The signal on the indicator is the first gray dot after a series of black dots. (This is shown in detail in the charts on this page.)
4. 4. Once the first gray dot appears after a series of black dots, go long if the histogram is above zero. Once the signal fires, just place a market order. This is a momentum play, and a trader shouldn't mess around with limit orders that may not get filled. (Remember the whole thing about weenies and teenies?)
5. 5. Base stops on the timeframes you are using. For five-minute charts, use a 20-pip stop. A 15-minute chart gets a 25-pip stop; 60-minute chart a 30-pip stop; and a daily chart a 50-pip stop. One pip equals 1/100 of a cent and equates to $10 on a regular-sized contract and $1.00 on the minis.
6. 6. Base target purely on the momentum of the trade. Once the momentum signal starts to weaken (rolls over), get out of the trade at the market.
7. 7. Don't trail stops. Treat this position like I treat my marriage--I may want to try to change something about the trade, but in the end I've learned it's best to just leave it alone.

Figure 4 EURUSD Forex: September 2004

In Figure 5, a five-minute chart of the online currency trading euro, we go into "black-dot territory" a little before 10:00 a.m. (Eastern time); 25 minutes later, the first gray dot appears (point A). The histogram is above zero so I go long at the market and am filled at 1.2054. I place a stop at 1.2034. The market rallies steadily for the next 90 minutes and starts to lose momentum just before 12:00 p.m. (point B). I exit at the market and am filled at 1.2153 for a gain of 119 pips, or $1,190 per contract.

Figure 5 EURUSD Forex: September 2004

When Online Currency Trading Is Quiet…

Box plays and squeeze plays show when the markets go into quiet mode. The only reason markets go into quiet mode is because they are building up energy for their next major move. A trader should be on alert for this move, and of course, also for the direction of the move. Both of these setups can help traders take advantage of ebbs and flows in the market.

In parting, I can't emphasize enough how important it is for traders to find a market that fits their own personality if they hope to be successful. If you find that you are only happy if you are buying breakouts and selling breakdowns, then the online currency trading euro is probably your market of choice. This online currency trading market breaks and trends well, while the E-mini S&Ps tend to suck in traders with false breakouts and breakdowns. In other words, if you are buying breakouts in the S&Ps and getting killed, then give the online currency trading euro a try.