Capturing volatility in Today's Currency Market Part II
Expert: John F. Carter, President of Trade the Markets, Inc.
Start: March 9, 2006 - 16:30GMT 11:30EST
End: approx. 12:30GMT 12:30EST
Topics that will be covered for above session are:
- How Much Should You Open An Account For?
- Should You Open a Mini or Standard Account?
- Avoid Using The Same Information Twice
- Trading with Long Term Trends for Short Term Gains
Who is John F. Carter?
John F. Carter, CTA, is president of Trade the Markets, Inc., and principal of the money management firm Razor Trading. Carter speaks often at Trader's Expo and other trading industry events, and is a regular contributor to SFO magazine, award-winning website tradethemarkets.com, and Chicago Board of Trade publications.
John has written numerous articles and has been a featured speaker at a number of major investment conferences over the last 4 years. In addition to trading, he consults with various brokerages, money managers and exchange.
Click to enlarge:
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. The “heads up” on this indicator is the first black dot. - This is not a trade signal, but a heads up that a trade signal is setting up. This indicates when the Bollinger Bands are trading inside the Keltner Channels.
3. The signal on the indicator is the first gray dot after a series of black dots. This indicates that the Bollinger Bands have come back outside of the Keltner Channels. This is shown in detail in the charts that follow.
4. Once the first gray dot appears after a series of black dots, I go long if the histogram is above zero. Once the signal fires, I just place a market order. This is a momentum play, and I don’t want to be messing around with limit orders that may not get filled.
5. For day trades, I place the following minimum money management stops. If the stop is also near a key price support level, I will take that into consideration and adjust accordingly. For example, if my entry is 1104.00 on the S&Ps and the daily pivot is at 1101.75, I would move my stop to just below that pivot level to 1101.50, for a stop of 2.50 instead of 2.00. I find that nine times out of ten, I just use the default stop.
EURUSD: 20 pips
6. For swing plays and position trades (taken off the daily charts), I place the following stops. I take into consideration the same key levels as discussed in item 4.
EURUSD: 100 pips
7. My target is based purely on the momentum of the trade. Once the momentum index signal starts to weaken, I get out of the trade at the market.
Click to enlarge:
Click to enlarge:
Click to enlarge:
Fxstreet Moderator (Mar 9, 2006 11:36:55 AM)
Today I am delighted to welcome our guest speaker John F. Carter, President of Trade the Markets, Inc.
John Carter (Mar 9, 2006 11:37:20 AM)
Thanks for having me
John Carter (Mar 9, 2006 11:37:40 AM)
Today I just wanted to talk a little more about volitility in the forex markets and how to take advantage of it
John Carter (Mar 9, 2006 11:38:11 AM)
If you look at the first chart that is posted of USDCHF, its just a plain bar chart with no indicators
John Carter (Mar 9, 2006 11:38:39 AM)
by just looking at it its hard to get a sense of which way it is going to go next
John Carter (Mar 9, 2006 11:39:14 AM)
however, if you look at the next chart it shows a way to help get a better feel of what is going on
John Carter (Mar 9, 2006 11:39:28 AM)
it has a pair of bollinger bands (marked in red)
John Carter (Mar 9, 2006 11:39:39 AM)
and Kelter Channels (marked in blue)
John Carter (Mar 9, 2006 11:39:49 AM)
and a momentum oscillator at the bottom
John Carter (Mar 9, 2006 11:40:39 AM)
This setup helps to identify times when the market is QUIET
John Carter (Mar 9, 2006 11:40:46 AM)
which is what I'm interested in
John Carter (Mar 9, 2006 11:41:07 AM)
I call this a "squeeze"
John Carter (Mar 9, 2006 11:41:44 AM)
The squeeze is a setup that I use for both day-trading and swing-trading. I’d like to take a moment and discuss both of these trading styles. I like to focus a portion of my trading on scalp plays, where I’m jumping in and out of the market with a little piece of profit here, and a little piece of profit there. I call these my bread and butter trades, and my primary focus with these trades is the creation of monthly income. However, I also like to focus a part of my time looking for trade setups that are longer term in nature. By longer term I’m referring to positions that I will be in for a few days to a few weeks, or possibly even a few months. Any fund manager who is reading this is grinning—a few weeks is still extremely short term for them. However, this is one of the great benefits of being an individual trader. There is much more flexibility concerning getting in and out of positions in a shorter time frame.
John Carter (Mar 9, 2006 11:43:39 AM)
The benefit of these types of swing trades is that a person is “in” the market and already positioned for the move. The markets spend a lot of time in trading ranges, building up energy for their next major move. By the time the move fires off, it is usually out of the blue and violent, leaving many day traders behind. This includes the times when a market will gap open and then spend the rest of the day stuck in a narrow range, totally bypassing the day traders. That’s why we call this move a “gap and crap.” By keeping some exposure in positions on a swing type basis, I will frequently participate in larger moves that leapfrog over many of the day traders. The secret to swing-trading is realizing that “being positioned” is half the battle, and not stressing out over a position that is not working out right away. The markets never break when they are expected to, and they will do so only when they are good and ready, usually when the greatest number of people is unprepared.
John Carter (Mar 9, 2006 11:45:11 AM)
Sometimes “being positioned” means waiting for weeks for the move to finally unfold. This requires patience and the ability to step aside and not obsessively stare at the charts all day. This is a huge problem for most traders. They sit back, they watch the charts, they get emotional, and they get faked out and close the trade. Typically, once that process has completed itself—faking out as many traders as possible—the markets will make their move. If everybody is expecting a move, then everybody is already positioned for it. If everybody is positioned for a big down move, then everybody is already short and there is no one left to sell. It’s a great system. It’s also how the markets always have worked and always will work.
John Carter (Mar 9, 2006 11:46:55 AM)
One of the best trading books I’ve ever read on managing “swing trader anxiety” is called How I Made Two Million Dollars in the Stock Market by Nicolas Darvas. This book was written a few decades ago and remains one of my favorites. It’s a quick, easy read and very entertaining. For anyone who has trouble hanging onto swing positions and jumping out too early, this book is a must read. Although this book talks about stocks, it is applicable to all markets.
John Carter (Mar 9, 2006 11:47:27 AM)
The squeeze takes advantage of quiet periods in the market when the volatility has decreased significantly, and the market is building up energy for its next major move higher or lower. This indicator was introduced to me by my trading partner, Hubert Senters, and it has become an integral part of my own trading plan.
John Carter (Mar 9, 2006 11:48:35 AM)
For students of Bollinger Bands, periods of low volatility are identified as the times when the bands “move closer together.” This is always great in hindsight, but in real time, how does a trader know that the current narrowness is really narrow enough to qualify as low volatility? This setup answers that question by adding the Keltner Channels as well as a momentum index oscillator.
John Carter (Mar 9, 2006 11:49:58 AM)
For readers who are unaware of how these indicators work, I’ll take a few moments to explain them here. Bollinger Bands are a type of envelope that is plotted at standard deviation levels above and below a moving average. This produces an effect of having the bands widen during periods of higher volatility and contract during less volatile periods. During periods of lower volatility, in sideways moving markets, the bands contract toward the moving average. Keltner Channels are based on a standard moving average. The actual band lines are offset by a positive and negative standard deviation value from the central moving average value, to provide upper and lower bands. While the Bollinger Bands expand and contract as the markets alter between periods of high and low volatility, the Keltner Channels stay in more of a steady range.
John Carter (Mar 9, 2006 11:51:04 AM)
The momentum index oscillator is used to estimate the direction, velocity, and turning points of market movements. Make sense? If not that’s fine. I don’t understand how electricity works, but I know when I plug my computer into an electric outlet, it will turn on. Now let’s look at how I use all this for a setup.
John Carter (Mar 9, 2006 11:51:54 AM)
The quiet periods I’m looking for are identified when the Bollinger Bands narrow in width to the point that they are actually trading inside of the Keltner Channels. This marks a period of reduced volatility and signals that the market is taking a significant breather, building up steam for its next move. The trade signal occurs when the Bollinger Bands then move back outside the Keltner Channels.
John Carter (Mar 9, 2006 11:52:47 AM)
I use a 12-period momentum index oscillator to determine whether to go long or short. If the oscillator 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. These readings are 20 and1.5 for the Keltner Channels and 20 and 2 for the Bollinger Bands. I also took an extra step and turned all these into an indicator which makes it easier to read on the chart, which I explain in a moment.
John Carter (Mar 9, 2006 11:54:00 AM)
I use the squeeze signal on various time frames, as I like it for both day-trading and swing-trading. On the various currency pairs, for example, a squeeze on a two-minute chart can move the market 10 pips, a five-minute chart 15-20 pips, and on a daily chart, several hundred pips. The kicker, of course, is that the smaller the time frame, the more frequent the signals. A two-minute chart may fire off three to five signals in a day, while the daily chart will fire off six to seven signals over the course of an entire year.
John Carter (Mar 9, 2006 11:55:01 AM)
So -- now to the trading rules for the squeeze play -- if you look at the information that has been posted for you, right under the first chart, there is a list of trading rules
John Carter (Mar 9, 2006 11:55:59 AM)
You can see the differences in the 3 "black background" charts on USDCHF -- blank chart, one with the bollinger bands, and one with an indicator that has dots and histograms along the bottom of the screen
John Carter (Mar 9, 2006 11:56:33 AM)
for this chart, when you see red dots at the bottom of the screen, this means that the bollinger bands are trading inside of the keltner channels and is a heads up that a TRADE SETUP IS TAKING PLACE
John Carter (Mar 9, 2006 11:57:18 AM)
Then, when you get the next green dot (after the series of red dots), this means that the bollinger bands are now back outside of the kelter channels and that IT IS TIME TO TAKE THE TRADE
John Carter (Mar 9, 2006 11:57:40 AM)
at this point, if the histogram is blue (above zero) go long and if it is red (below zero) go short
John Carter (Mar 9, 2006 11:57:58 AM)
Now, let's look at the two white charts at specific plays on EURUSD
John Carter (Mar 9, 2006 11:58:48 AM)
1. I like to use the squeeze on the various currency pairs in the forex markets as well. I normally like to use the 60-minute charts and 5-minute charts, but it also works on the daily charts. On August 23, 2004, I woke up to see that the euro had just fired off a short squeeze on the 60-minute chart (see Fig. 10.18). I went in and shorted at the market, getting filled at 1.2252. I place a 20-pip stop at 1.2272. (Remember, one pip in this currency pair equals 1/100 of a cent and equates to $10.00 on your P&L).
John Carter (Mar 9, 2006 11:59:14 AM)
2. The market sells off considerably, and the momentum on the histogram never lets up. I stay in the trade all day, exiting at 4:00 p.m. Eastern at point #2, when the U.S. stock markets close. The main reason I do this is that this started off as an intraday play, and I generally get out of the office after the stock markets close to go clear my head. I exit at the market and am filled at 1.2146 for a gain of 106 pips, or $1,060 per contract. This is like making 212 points on the YM.
John Carter (Mar 9, 2006 11:59:30 AM)
that's for the first chart, now let's look at the second chart
John Carter (Mar 9, 2006 11:59:39 AM)
1. On this five-minute chart of the euro currency we go into black dot territory a little before 10:00 a.m. Eastern on September 8, 2004, and 25 minutes later we get our first gray dot at point #1 (see Fig. 10.19). The histogram is above zero, so I go long at the market, and I’m filled at 1.2054. I place a stop at 1.2034.
John Carter (Mar 9, 2006 11:59:59 AM)
2. The market rallies steadily for the next 90 minutes and starts to lose momentum just before 12:00 noon, at point #2. I exit at the market and am filled at 1.2153 for a gain of +119 pips.
John Carter (Mar 9, 2006 12:00:45 PM)
So, hopefully these examples and explanations gave you an idea of why its important to use "quiet times" in the market to set up new plays
John Carter (Mar 9, 2006 12:01:06 PM)
and by using these indicators it will help tell you which way the market is going to move once it perks up again
John Carter (Mar 9, 2006 12:01:30 PM)
So thanks for stopping by -- I can answer any questions if you have them
John Carter (Mar 9, 2006 12:01:47 PM)
Also -- we have additional resources at both www.razorforex.com and www.tradethemarkets.com
Fxstreet Moderator (Mar 9, 2006 12:02:27 PM)
If you have any questions please post them now
hanc112 (Mar 9, 2006 12:03:28 PM)
What constitutes a "gray dot" for those using a chart like your second blackbackground w/ BBs, KC & Mom? Price moving outside KC or close outside KC?
John Carter (Mar 9, 2006 12:04:16 PM)
the gray dot is just like the red dot on the black background charts -- it means that the BB's have contracted to the point where they are now trading inside of the KC's
John Carter (Mar 9, 2006 12:04:45 PM)
sorry to clarify -- the BLACK dot
John Carter (Mar 9, 2006 12:05:02 PM)
indicates that the bb's are inside of the kc's
John Carter (Mar 9, 2006 12:05:13 PM)
then when you get the next GRAY dot after a series of black dots
John Carter (Mar 9, 2006 12:05:20 PM)
that is the trade signal
John Carter (Mar 9, 2006 12:05:36 PM)
and if the histogram is above zero its a long and if below zero its a short
chazl (Mar 9, 2006 12:06:18 PM)
If you are using the Squeeze for scalping, would you use a 2min aqnd 5 min only? Any tick charts? Would you use any other signals (momentum,etc.)?
John Carter (Mar 9, 2006 12:07:16 PM)
tick charts are fine but the signals are very short lived -- if you are just looking for 5 or 10 pips its fine
John Carter (Mar 9, 2006 12:07:37 PM)
For other indicators I like to focus just on price and look at trendlines, fib levels, etc
John Carter (Mar 9, 2006 12:07:46 PM)
a squeeze that lines up with one of these key levels is a bonus
John Carter (Mar 9, 2006 12:07:55 PM)
and has a slightly higher probability of success
Fxstreet Moderator (Mar 9, 2006 12:09:15 PM)
Thank you very much for that John..
John Carter (Mar 9, 2006 12:09:36 PM)
Sure, thanks for having me over. Good Trading to everyone.
Fxstreet Moderator (Mar 9, 2006 12:09:52 PM)
If your question was not answered during the course of this chat, please contact Email John for a personalized answer: email:
John Carter (Mar 9, 2006 12:10:19 PM)
sure feel free, email@example.com
Fxstreet Moderator (Mar 9, 2006 12:10:59 PM)
We also hope you liked this Q&A look & feel and, educational, and beneficial to your trading day
Fxstreet Moderator (Mar 9, 2006 12:11:25 PM)
Some good new I am pleased to announce that the full transcripts are back for all who would like to enjoy their contents. Please check out our new web blog and post comments and make it a interesting educational place for traders to meet. Transcripts : http://www.fxstreet.com/chat/transcriptlist.asp
Fxstreet Moderator (Mar 9, 2006 12:11:43 PM)
Available in 1 hour
Fxstreet Moderator (Mar 9, 2006 12:11:49 PM)
PLease join us now for another session
Fxstreet Moderator (Mar 9, 2006 12:11:54 PM)
sign in at this link