Two versions of the squeeze momentum indicator are frequently discussed; the Bollinger Bands Squeeze and the Bollinger Keltner Squeeze. Other than the below description, you may also review our Squeeze Indicator Spotlight (with video).
Indicator Description
A third version if this setup is available with our squeeze momentum indicator. We’ve coined this a full squeeze scenario as it takes place when both of the Bollinger and Carter scenarios apply at the same time. Therefore, you will have a squeeze setup occurring in both a low volatility and a low true range volatility scenario.
The Bollinger Bands Squeeze
The Bollinger Bands® squeeze will occur in a low volatility market, as outlined by John Bollinger in his book “Bollinger on Bollinger Bands®”. Bollinger Bands® display standard deviation levels above and below a moving average. During periods of high volatility, the bands will widen. Conversely, during less volatile periods the bands will narrow. The squeeze momentum indicator will therefore indicate low market volatility when the standard deviation of the Bollinger Bands® reach a minimum for a 120 bar lookback period. John Bollinger suggests using the Relative Strength Index (RSI) together with a volume-based indicator to validate setups.
The Bollinger Keltner Squeeze
The Bollinger Keltner squeeze was discussed by John F. Carter in his book “Mastering the Trade”. This setup will materialize during a period of consolidation. However, the Bollinger Keltner squeeze is not necessarily a low volatility setup. It compares true range volatility with directional volatility, i.e. when the Bollinger Bands® move inside the Keltner Channel bands.
Breakouts then occur once the Bollinger Bands® move back outside the Keltner Channel. Carter suggests validating setups using a 13 bar momentum period. His version furthermore use a fast / slow balanced momentum calculation to determine trend direction. Finally, the squeeze momentum indicator found here applies the average true range calculation, as opposed to the average range. Therefore, it is not an exact replica of the approach suggested by Carter.
LizardIndicators’ Squeeze Momentum Indicator
In summarizing the above, our squeeze momentum indicator identifies the following setups:
- John Bollinger Squeeze / Bollinger Bands Squeeze: Occurs when the standard deviation reaches a threshold of low volatility, compared to the 120 bar lookback period.
- Carter Squeeze Setup / Bollinger Keltner Squeeze: Occurs when the Bollinger Bands move inside the Keltner Channel bands (consolidation).
- LizardIndicators Full squeeze: Occurs when both of the Bollinger and Carter scenarios apply at the same time, i.e. low volatility and low true range volatility.
For the Bollinger Squeeze, the volatility threshold has to be low (not a minimum measure as defined by Bollinger as compared to the 120 bar lookback period). You may note that the default threshold value is set to 1.2. If increased, fewer low volatility setups will plot.
The LizardIndicators squeeze momentum indicator aligns two momentum periods, 10 and 25 bars. You may eliminate distortions caused by the data included in the lookback period, by applying the balanced momentum calculation. This in turn reduces the number of noise signals.
Additional Squeeze Momentum Indicator Features
This version of the squeeze momentum indicator will also confirm breakouts by certain price action requirements. For long signals, the signal bar has to close above the high of the previous bar (up thrust bar). For short signals, the signal bar has to close below the low of the previous bar (down thrust bar).
The indicator comes with the following additional options to filter signals:
- Minimum bar duration period for the squeeze (by default has to occur on 3+ bars)
- Maximum number of bars for when a signal bar has to plot (by default price action confirmation within 5 bars)
Finally, the Market Analyzer has three columns to access the following information:
- Squeeze: On (+1), Squeeze Off (0)
- Momentum Trend: Long (+1), Short (-1) or Neutral (0) (3)
- Trade Signals: Long Signal (+1), Short Signal (-1) and No Signal (0)
Other Library Indicators
Other indicators from our Channel Indicators category, namely the Regression Channel and the Donchian Channel are also available. The library also has a separate version of this indicator, displaying the Squeeze setup via oscillator values.
You may increase the probability of locating profitable setups by determining the higher time frame trend bias, analyzing range / volume and avoid entries that run into key support / resistance levels. A variety of Support / Resistance indicators are available from the Session Tools and Fibonacci indicators categories, including the Current Day Fibonacci Levels / Prior Day Fibonacci Levels, Current Week Fibonacci Levels / Prior Week Fibonacci Levels, the Current Month Fibonacci Levels / Prior Month Fibonacci Levels and the Current N Month Fibonacci Levels / Prior N Month Fibonacci Levels . A prior Indicator Spotlight looked at Fibonacci Retracement Levels specifically.
For volume analysis, consider Better Volume, Force Index or Relative Volume. Our NinjaTrader Relative Volume indicator was discussed in our Indicator Spotlight. For instruments that lack reliable volume information (FX/Crypto currencies), you may consider analyzing Relative Ranges. The Relative Ranges indicator was also reviewed in the Indicator Spotlight. A separate Range Analysis indicator can also be used to determine a higher timeframe consolidation, as discussed in our Spotlight on the Opening Range Breakout Strategy.
Finally, managing open profits may be done by using the Wilders Volatility Stop. Other trailing stop indicators are available from the Trailing Stops category.
All of the above, including the squeeze momentum indicator, are available for NinjaTrader 8.