A frequently discussed setup is “The Squeeze” which occurs in situations of low volatility. One may apply the Squeeze indicator to identify situations when the market is building up momentum for its next major move higher or lower. Two well known squeeze setups are “Bollinger on Bollinger Bands®” by John Bollinger and John F. Carter’s version described in “Mastering the Trade”.
In the following we’ll first explain what distinguishes the two setups, and then look at how our Squeeze momentum indicator applies the concepts. To learn more, watch the video or continue reading below:
The Bollinger Squeeze:
Briefly, the Bollinger Bands display standard deviation levels above and below a moving average. The bands widen during periods of high volatility and narrow during less volatile periods. A Squeeze occurs when the Bollinger bandwidth, i.e. standard deviation, reaches a minimum for a 120 bar lookback period. This is what’s referred to as a Bollinger Bands Squeeze (link goes to our Squeeze indicator that display setups on a separate panel).
Bollinger furthermore suggested different approaches for identifying the direction of breakouts, for example using the Relative Strength Index (RSI) together with a volume-based indicator.
The Bollinger Keltner Squeeze:
Carter’s approach compares the Bollinger Bands with the Keltner channel. If the Bollinger Bands narrow in width, moving inside the Keltner Channel, it constitutes a Carter Squeeze setup.
Carter basically compares true range volatility with directional volatility. Therefore, it is not necessarily a low volatility scenario, but a situation that occurs in consolidating or sideways markets.
Breakouts from Carter’s TTM Squeeze indicator occur when the Bollinger Bands move back outside the Keltner Channel. Carter then validates these setups by using a 13 bar momentum period.
LizardIndicators’ Squeeze Indicator:
Our Squeeze indicator identifies one of the following scenarios:
- Low volatility squeeze: Occurs when the standard deviation reaches a period of low volatility, compared to the 120 bar lookback period.
- Consolidation squeeze: Occurs when the Bollinger Bands narrow in width, moving inside the Keltner channels (range bound market).
- Full squeeze: Occurs when both of the above scenarios apply at the same time, i.e. low volatility as indicated by standard deviation for the lookback period, and low true range volatility.
For the Bollinger Squeeze, we want low volatility (but not minimum) when compared to the 120 bar lookback period. By default, the threshold is set to 1.2. By increasing this value, the low volatility definition will become more stringent, effectively delivering fewer low volatility setups.
All of the above squeeze indicator breakouts must be aligned by two momentum periods, 10 and 25 bars. Also, in order to eliminate distortions from the lookback period (and reduce noise signals), the Balanced Momentum calculation is used
Finally, the squeeze indicator breakouts have to confirmed by price action, i.e. Thrust Bars. For long signals, the signal bar has to close above the high of the previous bar. For short signals, the signal bar has to close below the low of the previous bar.
Squeeze Indicator Filters
Our Squeeze indicators also come with the following options to filter signals:
- Minimum bar duration period for the squeeze (default is set to 3 bars, i.e. minimum of 3 Squeeze Dots need to plot in order to be a valid setup)
- Maximum number of bars for a setup to be confirmed by price action (default is set to 6 bars, i.e. a Thrust Bar has to plot within 6 bars following a squeeze breakout)
To review our Squeeze momentum indicator, please follow the link below:
Other Library Indicators
The Indicator Library for NinjaTrader 8 contains two versions of the Squeeze Indicator. One version displays the low volatility setups as oscillator values, the other via channel lines. You may also review another momentum breakout setup in our Indicator Spotlight on the Traders Dynamic Index indicator. Furthermore, to manage open profits, consider the tools available in our Trailing Stops category. Finally, our Indicator Spotlights previously discussed the ATR Trailing Stop and the Wilder Volatility Stop.
