How to trade profitably with the help of the Squeeze Momentum indicator. Settings and chart examples

The indicator was created by John Carter. He made USD 18.2 million on options and futures trading in 2020, which is 1,270% of annual yield. Squeeze Momentum shows periods when volatility increases or decreases, in other words, when the market goes from the trend into flat movement and vice versa.

The market consolidates 80% of time and only 20% of time it moves in a certain direction. It is true for any time-frame. There is always a breakout after the flat movement (especially if it lasts long enough). Traders like to trade such breakouts very much because these breakouts are often followed by a strong and lengthy trend movement, on which they can make money.

It is also very important for traders to understand the current market state because different types of trades work differently in the trend and flat.

For example, a trader can confidently buy on a new high during a trend market (how to identify a trend day). However, if he buys on a new high during a flat, he will be losing his capital.

Similarly, it is dangerous to short new highs during an obvious bullish trend. Despite the fact that SM is a technical indicator, it is not lagging and can give a warning about a price reversal.

In fact, Squeeze Momentum combines two indicators – Bollinger Bands with 20.2 settings and Keltner channel with 20 and 1.5 settings – and helps to find consolidation periods, after which a breakout may take place and the trend price movement may start.

• Bollinger Bands measure a standard price deviation from the average value. Bollinger Bands measure volatility in the market. If they shrink, it means that the market is inactive. If they expand, it means that there was a breakout and the volatility increased.
• Keltner Channel measures Average True Range (ATR).

Technically, the SM indicator looks for places where Bollinger Bands go outside ATR. At these moments, ‘energy is released’ and bands expand. See Picture 1.

Squeeze Momentum has 2 visualization types.

• Grey and black dots. Black dots appear on the indicator when Bollinger Bands are inside the channel. As soon as Bollinger Bands break outside the Keltner Channel, the dots turn grey.
• Red and green histograms. They show the price movement. Bright-green colour changes into dark-green colour when the price starts to decrease and, consequently, bright-red colour changes into dark-red colour when the price starts to increase.

Example. We marked the period of a flat price movement with red vertical lines in a 15-minute RTS index futures (RIH1) chart. At this time, Bollinger Bands are inside the Keltner Channel and there are black dots on the indicator.

We marked the period of the trend price movement with black vertical lines. At this time, there are grey dots on the indicator and the bands go outside the channel. See Picture 2.

According to John Carter statistics, the SM indicator allows selecting the consolidation zone breakout moment with more than 75% success probability. However, traders should remember that consolidation doesn’t always end with the explosive movement. Sometimes, it could be a rather slight price movement.

John Carter writes that, technically, the first grey dot shows the trade entry.

If the histogram is above zero, a long position should be opened, if it is below zero – a short one.

You should stay in the trade until the histogram becomes bigger/smaller. The average movement lasts for about 8-10 bars.

If movements on different time-frames coincide, it intensifies signals.

You can use the following as exit signals:

• Fibonacci numbers,
• certain range expansion,
• significant support/resistance levels.

However, despite the simple indication in the form of the histogram colour, traders may experience difficulties in identifying the direction, in which the price would move after a breakout. That is why, even the indicator creator applies additional filters for identifying the trade direction.

For example, you can use the ADX indicator.

• If the blue line is above the red one, it means that it is an uptrend.
• And vice versa, if the red line is above the blue one, it means that it is a downtrend.

Let’s consider the 15-minute RTS index futures (RIH1) chart example. See Picture 3.

We marked the breakout, which coincides with the bullish trend, with point 1. The breakout shows Squeeze Momentum, because black dots are replaced by grey ones and the green histogram starts to grow. We additionally confirm the price direction with the help of ADX – the blue line looks up and is above the red one. Besides, the green line also shows intensification of the uptrend because it also goes up sharply.

Squeeze Momentum gives a signal about a breakout in point 2, but ADX, in this situation, cannot give traders an exact direction because all three lines are closely interwoven.