Introduction to the Squeeze Play

The Squeeze Play is a volatility setup. It actually begins with an unusual lack of volatility for the market that you are trading. In other words, a market is trading with much less volatility than is usually the case judging by the market's historical data. Key point: The Squeeze Play relies on the premise that stocks and indexes fluctuate between periods of high volatility and low volatility. When periods of low volatility occur, a market should eventually revert back to its normal level of volatility. My strategy uses two indicators applied to Daily Bars: The well-known Bollinger Bands and... ...the much less well know Keltner Channels. With both the Bollinger Bands and Keltner Channels, I use the standard default settings that are used on vast majority of trading platforms that I've seen: Bollinger Bands: Length 20, Standard Deviation, 2 Keltner Channels: Length 20. There are two versions of the Keltner Channels that are commonly used. I use the version in which the bands are derived from "Average True Range." When I have looked at how Keltner Channels are configured in different charting programs, I've noticed that there can be some minor variations. You should not only be sure that you're using the formulation that uses Average True Range, but also that the center line is the 20-period Exponential moving average. Okay, let's get into the guts of of both of these indicators so that you'll understand why the combination of these two indicators is so effective.
	Bollinger Bands were made famous as a trading tool by John Bollinger in the early 1980s. A Bollinger band tells you the amount of volatility there is a given market relative to the recent past. When a market is very volatile relative to the recent past, the Bollinger band will expand. When a market is going through a period of low volatility relative to the recent past, the Bollinger band will contract.
	A Bollinger Band consists of three lines that are plotted for each day’s close over the course of time. A simple moving average. The simple moving average plus two standard deviations derived from closing prices. The simple moving average minus two standard deviations derived from closing prices. Different parameters in the Bollinger Band can be adjusted such as the period of the simple moving average and the number of standard deviations used. Use parameters that are usually the standard default setting. Bollinger Bands: Length 20, Standard Deviation, 2 Now, the statistical term that you don’t commonly hear in normal conversation is “standard deviation.” Understanding this term is the key to understand how a Bollinger Band detects and displays fluctuations in the degree of volatility. In plain English, standard deviation is determined by how far the current closing price deviates from the mean closing price. The formula for computing standard deviation is rather complex and I’m running the risk of oversimplifying (and offending math Phds) but the general concept is that the farther the closing price is from the average closing price the more volatile a market is deemed to be. And vice versa. That is what determines the degree of contraction or expansion of a Bollinger Band.
	Here’s What’s Missing In Bollinger Bands Before I get on with the discussion, let me state that I’m sure there are many traders who find the Bollinger Bands to be a valuable trading tool by itself. I think that’s fine and I wish them well. I only know that my own personal requirements as a trader from a risk/reward standpoint dictate that I need more information than what I can get from Bollinger Bands alone. As students of Bollinger Bands know, when the bands get "narrow", a breakout is about to occur. But how narrow is narrow? Chart created on Market Warrior, the flagship product of www.Mikulaforcasting.com. Chart 1 Note: The blue lines are Bollinger Bands. At point 1 the Red arrows are indicating a Bollinger Band Squeeze. At point 2 the Red arrows are indicating another Bollinger Band Squeeze. What’s hard about this situation is you do not know how to qualify this squeeze. What we need to do is to quantify how narrow is narrow so that you can determine when a potential trade is triggered. The way we do this is to add the Keltner Channel to the chart.
	What Keltner Channels Are…In Plain English Keltner Channels, which were originally created by Chester Keltner in 1960s and later modified by Linda Raschke, look similar to Bollinger Bands. They consist of a center line with an upper band and a lower band. The big difference between these two indicators is the following: Bollinger Bands: The distance of the outer bands from the center line is based on the movement of the closing price. The more the closing price moves from day-to-day, the more the outer bands expand away from the center line. Keltner Channel: The distance of the outer bands from the center line is based on the range from the high to low on a daily basis. The more the trading range varies, the more the outer bands expand away from the center line. As with Bollinger Bands, the formula for Keltner Channels is rather involved. We could get into it, but I'd rather just convey the general concept. The idea behind Keltner Channels is that the distance between the center lines and outer bands represent the mathematical norm. As such, you would normally expect to see all of the current price action contained within the bands of the Keltner Channel. The traditional use of the Keltner Channel is to look for a trading opportunity when the price action breaks outside of the Keltner Channel. When that happens, it means that an unusual level of momentum is coming into the market and a strong directional move may be underway. But here is the most useful observation from the perspective of the Squeeze Play. Go back and look at the Bollinger Band definition. Remember, the bands are a function of how much the current closing price differs from the average closing price. That's simplifying it a tad, but that is the general idea. Now, the Keltner Channel is based on the range between the high and the low. Let me ask you a question. Which do you think will tend to exhibit more change when the market goes from an abnormally non-volatile state back to normal volatility state? a. The difference between the current close and the average closing price or b. The range between the high and the low Here's my answer: While both values will tend to change, the answer is "a." Closing values will tend to exhibit more change than the trading range. As a result of this the outer bands of the Bollinger Bands will tend to expand and contract faster than the outer bands of the Keltner Channels. Now See chart 2 below Bollinger + Keltner.

Now you can see how this relationship allows us get a clear indication of potential trades stemming from volatility expansions. Bollinger Band=Blue Keltner Channel=Red In chart 2 now that we have the Keltner Channel overlaid on top of what you saw in Chart 1, we can qualify the Squeeze. You only take a squeeze play that meets the following criteria: You only consider taking a squeeze play when both the upper and lower Bollinger Bands go inside the Keltner Channel. Points 1 and 2 show examples of the Bollinger Bands (blue lines) going inside the Keltner Channel (Red lines). At those points, you know the squeeze has started. When the Bollinger Bands (BOTH blue lines) start to come out of the Keltner Channel (red lines) the squeeze has been released and a move is about to take place. Bollinger Bands and Keltner Channels tell you when a market is transitioning from low volatility to high volatilty. Using these two indicators together is a valuable technique in itself and I would imagine that some of you would be able to make use of it. In additional of this 2 super indicators, add momentum + Volumn and apply the knowledge of candlestick will further enchance your power in Squeeze Play. Happy Trading.

How to use Bollinger Bands to Detect Market Moves

Standard Deviation vs. Bollinger Bands

Standard deviations represent a classical statistical measure of volatility. For the investment markets, at any particular moment, the standard deviation reflects upon the variation in price that can occur relative to the fair underlying market value.

In essence, one would suspect that trading would always occur within this range, as the fundamental aspect of price changes are a result of the relative supply and demand available in the market.

Bollinger bands, when they expand, demonstrate increased volatility and interest in a particular trading instrument.

Contraction of the bands reflects upon uncertainty and a lack of interest in the market.

Reviewing graphical representations of Bollinger bands, one can see that price movements almost always occur within the limits representing the calculations derived.

Using Bollinger Bands for Entry and Exit Signals

For the individual investor attempting to determine optimal points of entry and exit, penetration of the bands represented by Bollinger limits provide opportunities to detect signals for significant market moves.

As investments tend to trade for long periods of time within a certain amount of detectable volatility, when that volatility has been penetrated, as exemplified by breaking one of the upper or lower bands, this becomes a prime signal that a significant market move is about to occur.

The purpose of the calculation of these limits is to filter out insignificant price action. Short-term price movements are rightfully viewed as random by nature.

Any individual can view the erratic character of short-term price variations. John Bollinger, using classical statistical methodologies and techniques, introduced a tool for the individual investor to eliminate the static noise that occurs in trading activity.

As the band's measure volatility, whenever they approach an upper limit, the investment is viewed as being overbought.

Conversely, when they approach the lower limit, the investment under consideration is viewed as being oversold.

Through the graphic representation presented, one can see that the overwhelming majority of the time, prices will trade between the Bollinger limits identified.

Effective Bollinger Band Techniques

As such, one technique for the detection of successful market moves is to sell at the upper limit and buy at the lower limit.

Historically, such a strategy produces consistent results. These results, however, do not always occur.

Consequently, one should always attempt to use other indicators to verify suspected movements. When confirmation can be ascertained, trading results are greatly improved.

It is not only possible to determine movements by the approach of limits, but also profitable entries and exits.

Penetrations of these Bollinger bands are equally attractive as entry and exit points for position undertakings.

These penetrations represent volatility signals that the trend will continue in the direction of the penetration.

No one indicator is infallible. Bollinger bands represent an attractive tool to determine market movements. They should be used, however, with other indicators to improve their performance results.

Bollinger Band Trading

So you want to learn how to master Bollinger band trading. That's a smart move because Bollinger bands are probably the best indicator you can use to achieve near perfect entry and exit consistently.

In fact when your done reading this page, and when you have signed up for our free download about Bollinger band trading you will know more than most traders know about how to trade with Bollinger bands.

There are the beginning concepts about trading Bollinger bands and then there are the advanced topics. Combined you posses a tool for insight that you really cannot get from any other indicator.

Bollinger band trading requires that you understand all of these concepts completely in making trading decisions using the bands.

1.Bollinger band squeeze
2.Bolinger band continuation
3.Bollinger band reversal

What makes Bollinger bands even more unique are the advanced concepts that accompany these signals that form.

As you observe a continuation, a squeeze or a reversal pay special attention to how the upper and lower bands respond to approaching price action.

take a look at the following diagram closely and with careful study because grasping the following is the golden key to successful Bollinger band trading.

Bollinger band trading tactics for advanced traders

The candlesticks present represent current approaching price action to the upper or lower band. Lets start with #1.

1. Extremely bearish, price is falling to a lower band and the KEY is of course watching both the upper and lower band as price approaches. In this case the upper is rising while the lower is falling indicating not only a potential explosion in price but one to the downside is extremely likely.

2. Extremely bullish, price is rising to the upper band and the KEY is keeping a watchful eye on BOTH band as price approaches. In this case the upper band haeds UP and the lower band falls, indicating a potential price explosion to the upside.

3. Price approaches the lower band while the upper and lower band remain flat. This is very insignificant and should be ignored unless things change.

4. Price approaches the upper band while the upper and lower bands remain flat. This is also insignificant and best left for the amateurs to enter.

5. Bearish candlestick at a lower band while band constrict - this is a sign that price is likely at least for now going nowhere. Wait do not enter.

6. Same here, a bullish candlestick at the upper band while the bands are constricting is a sign that not much is about to happen just yet.

7. Like #1 this is a sign that price is going to make a nice move but the lack of the upper band hooking up indicates that the move for now won't necessarily be explosive.

8. Also similar to its counterpart in that price will likely move but not to the explosive level that would be expedited if the lower band was hooking downward. The lack of the lower band hooking down limits the potential move here.