The Squeeze

the full squeeze

The Squeeze setup occurs in situations of low volatility. Two versions of the Squeeze are frequently discussed, namely that of John Bollinger in his book “Bollinger on Bollinger Bands®” and John F. Carter in “Mastering the Trade”.

Indicator Description

The Bollinger Squeeze:

Bollinger Bands® display standard deviation levels above and below a moving average. During periods of high volatility, the bands will widen and conversely, narrow during less volatile periods. A Squeeze occurs when the standard deviation of the Bollinger Bands®, reach a minimum for a 120 bar lookback period. In order to identify breakouts, Bollinger suggests using the Relative Strength Index (RSI) together with a volume-based indicator.

The Carter Squeeze:

Carter’s approach compares true range volatility with directional volatility. If the Bollinger Bands narrow in width to a point where they are inside the Keltner Channel, it constitutes a Carter Squeeze setup. Accordingly, it does not necessarily constitute a low volatility scenario, but rather a consolidating or sideways moving market.

Breakouts will occur once the Bollinger Bands move back outside the Keltner Channel. Carter then validates these setups using a 13 bar momentum period.

The LizardIndicators Squeeze Channel:

This version will identify one of the following squeeze scenarios:

  1. A low volatility squeeze: Occurs when the standard deviation reaches a threshold of low volatility, compared to the 120 bar lookback period.
  2. A consolidation squeeze: Occurs when the Bollinger Bands moves inside the Keltner channels (consolidation).
  3. 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). The default threshold value is set to 1.2. Increasing the threshold will deliver fewer low volatility setups.

The above squeeze scenarios must be aligned with two momentum periods, 10 and 25 bars. Also, a Balanced Momentum calculation is applied, eliminating distortions from the lookback period and reducing the number of noise signals.

Squeeze breakouts have to confirmed by price action. 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(DownThrust Bar).

The indicator also comes with the following options to filter signals:

  • Minimum bar duration period for the squeeze (default 3 bars)
  • Maximum number of bars for when a signal bar has to plot (default 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)

The indicator is available for NinjaTrader 8.