In the dynamic world of financial markets, traders rely on a range of technical indicators to identify potential trading opportunities. One such valuable tool gaining popularity is the Squeeze Momentum Indicator. Combining the strengths of Bollinger Bands and Keltner Channels, this indicator helps traders spot low-volatility periods just before price movements intensify.
In this article, we break down the Squeeze Momentum Indicator in simple terms, explain its settings and strategy, and explore how it can work in conjunction with other technical indicators like RSI and MACD.
Squeeze Momentum Indicator Meaning
The Squeeze Momentum Indicator is a blend of two popular technical indicators—Bollinger Bands and Keltner Channels. Its main purpose is to highlight moments when the market is consolidating and about to make a strong move. The squeeze occurs when Bollinger Bands contract inside the Keltner Channels, indicating low volatility. A breakout from this squeeze could signal a potential trading opportunity.
How Is It Calculated?
The indicator typically uses a 20-day simple moving average (SMA) to plot Bollinger Bands and overlays them with the Keltner Channels. When the Bollinger Bands are within the Keltner Channels, it signals a squeeze. A histogram shows momentum, often derived from a momentum oscillator (like a modified MACD or Klinger oscillator)—positive bars suggest upward momentum while negative bars indicate downward pressure.
A visual marker in the form of black or grey dots appears below the histogram. Black dots show that the market is in a squeeze (low volatility), and grey dots signal that the squeeze has been released.
Squeeze Momentum Indicator Settings
The default settings of the squeeze momentum indicator are:
- Bollinger Bands:20-period SMA, 2 standard deviations
- Keltner Channels:20-period EMA, 1.5 ATR (Average True Range)
- Histogram:Momentum calculated based on price changes (typically from an internal momentum oscillator
Traders can adjust these parameters based on their preferences and trading style, but the default settings are often effective for both intraday trading indicators and long-term analysis.
How to Use the Squeeze Momentum Indicator?
The Squeeze Momentum Indicator strategy revolves around spotting potential price breakouts from periods of low volatility. Here’s how traders use it:
- Entry Point: A buy signal usually appears when black dots change to grey, showing a squeeze release, and the histogram shifts to green. A sell signal occurs when the dots shift from black to grey and the histogram turns red.
- Exit Point: Traders may exit when the histogram starts to fade or change colour (e.g., from light green to dark green), indicating momentum loss.
This strategy works best when used in combination with other technical indicators like RSI and MACD. These tools can confirm momentum strength and direction, helping to validate trade signals.
Visual Representation
The squeeze momentum histogram is easy to read. Bright green bars show strong bullish momentum, while dark green bars indicate weakening bullish trends. Conversely, bright red bars signal strong bearish pressure, and dark red bars suggest momentum loss on the downside.
Dots below the histogram give clarity:
- Black dots: Squeeze in effect
- Grey dots: Squeeze has fired
This visual simplicity makes the squeeze momentum a valuable tool among modern stock market indicators.
Trading with Divergences
One advanced method of using the Squeeze Momentum Indicator is trading with divergences. Divergence happens when the price goes one way, but the histogram moves in the opposite direction.
- Bearish Divergence: Price makes a higher high while the histogram makes a lower high.
- Bullish Divergence: Price makes a lower low while the histogram makes a higher low.
These divergences can act as early warning signs of trend reversals. However, like all intraday trading indicators, the squeeze momentum should be backed by other analysis tools to minimise false signals.
Momentum and Market Timing
The squeeze doesn’t happen frequently, but when it does, it often precedes a significant move. Traders use the momentum value on the histogram to estimate the breakout’s potential and to determine the best entry and exit points.
Using this indicator on higher timeframes can offer stronger confirmation of trends. Using longer timeframes helps traders filter out short-term market fluctuations and concentrate on more significant price trends.
Risk Management and Strategy
The squeeze momentum indicator strategy is most effective when paired with solid risk management practices. Traders often:
- Use stop-losses just below support or above resistance.
- Combine squeeze signals with RSI or MACD confirmations.
- Avoid trading during news events or highly volatile periods without further confirmation.
Limitations of the Squeeze Momentum Indicator
While powerful, the squeeze momentum indicator is not foolproof. Its effectiveness can diminish during periods of extreme volatility. Also, false signals may occur, especially if used in isolation.
That’s why experienced traders recommend:
- Verifying squeeze signals with RSI or MACD
- Avoiding trades based solely on one technical indicator
- Testing the indicator settings on past market data before using them in real-time trading.
Combining with Other Indicators
For best results, use the Squeeze Momentum Indicator with:
- RSI (Relative Strength Index): Measures the speed and change of price movements; confirms overbought or oversold conditions.
- MACD (Moving Average Convergence Divergence): Identifies trend direction and potential reversals.
- Bollinger Bands: Already integrated within the squeeze concept but helpful for manual chart analysis.
This combination provides a more holistic view of market behaviour and improves the reliability of trading decisions.
Why Beginners Should Consider It?
Among all technical indicators, the Squeeze Momentum Indicator is intuitive and visually simple. Beginners can learn to spot squeeze and release patterns quickly and use them to plan trades. It also encourages traders to wait for confirmations, a discipline that is vital in intraday trading.
Furthermore, since it works on multiple timeframes, beginners can use it to develop both short-term and long-term trading strategies.
Conclusion
The Squeeze Momentum Indicator is a valuable addition to any trader’s toolkit. By detecting low-volatility periods before explosive price moves, it gives traders an edge in spotting profitable opportunities. When combined with tools like RSI, MACD, and other stock market indicators, it enhances decision-making and trading accuracy.
However, no tool is flawless. Always use the squeeze momentum indicator as part of a balanced trading plan, backed by thorough research and risk control. With practice, this indicator can help you gain more clarity in the often unpredictable world of stock trading.
FAQs
What is the squeeze Momentum Indicator?
The Squeeze Momentum Indicator helps identify market phases when volatility shifts, highlighting transitions from sideways movement to potential trending activity.
Is the Squeeze Momentum Indicator effective?
Yes, this indicator is useful for spotting periods before significant price moves. It also works well when paired with tools like RSI or MACD for better confirmation.
How can you trade using the Squeeze Momentum Indicator?
Traders look for the transition from black to grey dots on the histogram to detect breakouts. These signals are often confirmed with other technical tools for increased reliability.
How does the Squeeze Indicator function?
Displayed as histogram bars and dots around a horizontal axis, the indicator shows when an asset is consolidating and signals a likely breakout when volatility begins to build.
