TL;DR. The squeeze is on while both Bollinger Bands sit inside a Keltner Channel: volatility has contracted below its usual range. The momentum histogram says which way price is leaning when the squeeze releases. Every state is a number a rule can test: 1 while it holds, 0 when it does not.
What it measures
- Coiled volatility. Bollinger Bands widen and narrow with the standard deviation of the close; the Keltner Channel with the average true range. When the bands fit inside the channel, recent closes are unusually tight.
- The release. The squeeze turning off (bands back outside the channel) marks volatility expanding again, the moment breakout traders wait for.
- Direction. A smoothed momentum of the close, drawn as a histogram, leans up or down into the release.
Formula
Inputs in AlgoLift
| Setting | Default | Range | Notes |
|---|---|---|---|
| Bands period | 20 | 2 to 500 | Bars in the Bollinger Bands. |
| Bands width | 2.0 | 0.1 to 10 | Standard deviations from the bands' average. |
| Channel period | 20 | 1 to 500 | Bars in the Keltner Channel. |
| Channel width | 1.5 | 0.1 to 10 | Average true ranges from the channel's average. A wider channel calls more bars a squeeze. |
| Momentum period | 12 | 1 to 500 | Bars back the momentum compares with. |
| Momentum smoothing | 6 | 1 to 500 | Bars in the simple average of the momentum. |
Outputs in AlgoLift
| Handle | Type | Plotted | Notes |
|---|---|---|---|
| Momentum | Numeric | Always | The smoothed momentum in price units, drawn as a histogram around zero. |
| Squeeze on | Numeric (1 or 0) | On select | 1 while both bands are inside the channel. |
| Squeeze off | Numeric (1 or 0) | On select | 1 while both bands are outside the channel. |
| No squeeze | Numeric (1 or 0) | On select | 1 while one band is in and one out. |
Test a state with a Comparison: Squeeze on equals 1. Wired straight into a condition, 1 reads true and 0 false.
How to read it
- Squeeze on for several bars: volatility is compressed. Do not trade the direction yet; wait for the release.
- Squeeze on turns to 0: the compression has ended. Read the momentum's sign for the side.
- Momentum above zero and rising at the release: an upside break is more likely to carry.
- Squeeze off while momentum fades: the expansion is already old; late entries here buy the end of the move.
Best in, worst in
Best in markets that alternate quiet coils with sharp moves: index futures around the open, instruments before scheduled news.
Worst in steadily trending markets, where volatility rarely compresses and the squeeze seldom turns on.
Three setups
1. Release in the momentum's direction
Enter long when Squeeze on was 1 on the previous bar (through a Bars Ago modifier) and is 0 now, with Momentum above 0. Mirror it for shorts. A Set Stop Loss one ATR beyond the entry bar handles a failed release.
2. Squeeze as a breakout filter
Allow a Donchian Channels breakout entry only while Squeeze off is 1, so breakouts are taken once volatility is expanding.
3. Momentum exit
Exit with Set Exit Condition when Momentum crosses back through 0 against the trade (a Crossover of Momentum and 0).
Common mistakes
- Testing a state as a price. The states are 1 or 0. Compare them with 1, never with a price level.
- Entering during the squeeze. The signal is the end of the squeeze, not the squeeze itself.
- Tuning both widths at once. Each width changes how many bars count as a squeeze. Sweep one, hold the other, and look for a plateau (overfitting in trading).
Squeeze Momentum flags compressed volatility as a 1/0 state and leans the release with a momentum histogram: wait for the squeeze to end, then follow the histogram's sign.