The Squeeze Momentum Indicator, often known as TTM Squeeze, is a volatility and momentum indicator developed by John Carter of Trade the Markets (now Simpler Trading) that takes advantage of the tendency for price to burst out forcefully after consolidating in a narrow trading range.
Squeeze Momentum identifies periods when volatility increases or decreases, or when the market transitions from trend to flat movement and vice versa.
The market consolidates 80% of the time and moves in a specific direction only 20% of the time. It holds true regardless of time. After a flat movement, there is always a breakout (especially if it lasts long enough). Traders enjoy trading such breakouts because they are frequently followed by a strong and lengthy trend movement in which they might profit.
It is also critical for traders to grasp the current market state because different types of transactions perform differently in trending and flat markets.
During a trend market, for example, a trader can comfortably buy on a new high (how to identify a trend day). However, if he purchases on a new high during a flat, he will lose money.
Similarly, shorting new highs amid a clear bullish trend is risky. Despite being a technical indicator, SM is not lagging and might provide a warning of a price reversal.
The volatility component of the TTM Squeeze indicator uses Bollinger Bands and Keltner Channels to quantify price compression. If the Bollinger Bands are totally enclosed within the Keltner Channels, it suggests a very low volatility period. This is referred to as the squeeze. The squeeze is considered to have “fired” when the Bollinger Bands widen and move back outside of the Keltner Channel: volatility rises and prices are likely to break out of that tight trading range in one direction or the other. Small dots on the zero line of the indicator indicate the squeeze’s on/off state: red dots indicate the squeeze is on, and green dots indicate the squeeze is off.
Squeeze On/Off Dots
First, compute the security’s Bollinger Bands. Carter employs the conventional Bollinger Band settings of 20 periods and 2 standard deviations, but these values can be modified to match your trading requirements.
Second, compute the security’s Keltner Channels. Carter employs 20 periods for the moving average and ATR, as well as 1.5 for the ATR multiplier, but these values are also adjustable.
Carter employs the original Keltner Channels formula developed by Chester W. Keltner in 1960, and StockCharts employs the same formula to compute the Keltner Channels for the TTM Squeeze indicator. The modified Keltner Channels formula created by Linda Raschke in the 1980s is utilized elsewhere on the StockCharts website.
After calculating the upper and lower Bollinger Bands and Keltner Channels, the procedure for assessing the state of the squeeze is straightforward. If both of the following conditions are met, the squeeze will be on for that time period:
Upper Bollinger Band < Upper Keltner Channel Lower Bollinger Band > Lower Keltner Channel
If neither is true (one or both Bollinger Bands are outside of the Keltner Channel), the squeeze is off for that period.
Momentum Histogram
The TTM Squeeze indicator additionally contains a smoothed momentum oscillator to highlight the potential breakout direction. The momentum oscillator is created using the following stages in StockCharts’ implementation of the TTM Squeeze.
First, compute the Donchian midline for the number of momentum periods supplied (20 is the default):
(Highest high in 20 periods + lowest low in 20 periods) / 2
Second, compute the close’s SMA across the selected number of momentum periods (so by default, a 20-period SMA of price).
Third, using the following formula, compute the delta between the close and the average of the Donchian midline and SMA values:
Close - ( (Donchian midline + SMA) / 2 )
Finally, smooth the delta values using linear regression. The linear regression formula is outside the scope of this page, but it simply seeks the “best fit line” given the available data. The values of the momentum histogram indicate how far above or below the average the price is predicted to be.
Squeeze Momentum Indicator Visualization
There are two ways of visualization in Squeeze Momentum.
- Grey and black dots When the Bollinger Bands are within the channel, black dots appear on the indicator. The dots turn grey when the Bollinger Bands cross outside the Keltner Channel.
- Histograms in red and green. They depict price movement. When the price begins to fall, the bright-green color changes to dark-green, and when the price begins to rise, the bright-red color changes to dark-red.
Example. In a 15-minute RTS index futures (RIH1) chart, we identified the time with a flat price movement with red vertical lines. Bollinger Bands are currently inside the Keltner Channel, and the indicator has black dots.
We marked the trend price movement period with black vertical lines. At this point, the indicator has grey dots and the bands are outside the channel.
According to John Carter figures, the SM indicator provides for the selection of the consolidation zone breakout moment with a success chance of greater than 75%. However, traders should keep in mind that consolidation does not necessarily result in explosive movement. It could be a minor price movement at times.
Squeeze Momentum Indicator Interpretation
The TTM Squeeze indicator incorporates both volatility and momentum. The Squeeze dots show when volatility conditions are favorable for buying, while the momentum histogram advises whether to trade long or short.
The squeeze dots will be red when volatility is minimal. When volatility rises and the Bollinger Bands stretch beyond the Keltner Channels, the squeeze has “fired,” and the squeeze dots turn green. Carter suggests purchasing on the first green dot following one or more red dots.
The momentum histogram aids in determining which direction to trade in. If the momentum is above the zero line and rising (light blue bars), buy long; if the momentum is below the zero line and dropping (dark red bars), sell short.
For convenience of interpretation, the histogram bars are color coded. Bars above the zero line are blue, while those below it are red. Furthermore, a bar that is lower than the preceding bar is a deeper hue (dark blue or dark red), whereas a bar that is higher than the previous bar is a lighter color (light blue or light red).
Price movements following a squeeze fire typically last 8-10 bars. When the histogram reverses direction and begins to move back towards the zero line, it is time to sell.
The momentum histogram can also be utilized to pinpoint precise exit spots. Carter suggests selling after two bars in the new hue. For example, if the squeeze fires and the bars are light blue (above the zero line and increasing), he suggests selling when two dark blue bars appear in a succession (above the zero line and dropping).
The TTM Squeeze indicator can be used to a variety of timeframes. For confirmation, many chartists examine the same security in multiple timeframes. A squeeze that fires on both a daily and an hourly chart at the same time, for example, is a stronger signal than a squeeze that only fires on one timeframe.
How to Trade Using Squeeze Momentum Indicator?
According to John Carter, the first grey dot represents the transaction entry.
If the histogram is above zero, a long position should be opened; if it is below zero, a short position should be opened.
You should stay in the trade until the histogram changes size. The average movement lasts approximately 8-10 bars.
Signals are amplified when motions on multiple time scales coincide.
As exit signals, you can utilize the following:
- Fibonacci numbers,
- certain range expansion,
- significant support/resistance levels.
Despite the clear indicator provided by the histogram color, traders may have difficulty determining the direction in which the price will move following a breakout. As a result, even the indicator’s developer employs extra filters to determine trade direction.
You can, for example, employ the ADX indicator.
- If the blue line is higher than the red line, the trend is upward.
- If the red line is higher than the blue line, it indicates an downtrend.
Squeeze Momentum Indicator Trading Example
Consider the following 15-minute RTS index futures (RIH1) chart.
Point 1 represents the breakout, which aligns with the bullish trend. Because the black dots are replaced by grey ones and the green histogram begins to develop, the breakout indicates Squeeze Momentum. We also use ADX to confirm the price direction – the blue line looks up and is above the red one. Furthermore, the green line indicates an intensification of the uptrend because it rises fast.
Squeeze Momentum indicates a breakout in point 2, but ADX cannot provide traders with a definite direction because all three lines are intertwined.
Combining Squeeze Momentum Indicator With Cluster Analysis
It may be tough to sift out signals using technical analysis indicators. As a result, we will use cluster analysis and Market Profile to try to improve signal quality. Cluster analysis is the most recent and forward-thinking method of working with exchange data. It does not lag and displays information in real time. As the first filter, we will employ the Cumulative Delta indicator.
Cumulative Delta depicts how buyers and sellers ‘battled’ during a trading session. Unlike the normal Delta, Cumulative Delta totals (or accumulates) the difference in market buys and sells from the start of a trading session (or from another chosen moment). This indicator assists traders who work with market orders to correlate price movement and aggression. If a large number of market buys or sells are unable to move the price in the desired direction, it indicates that there are stronger players with alternate plans.
Example. Consider the same 15-minute RTS index futures (RIH1) chart, but this time we include Cumulative Delta instead of ADX.
The problem is visible near the first black vertical line. Squeeze Momentum is more than zero, and Cumulative Delta is increasing, indicating that buyers are active and encounter little opposition from sellers.
Near the second black vertical line, the issue becomes more complicated. Squeeze Momentum is in the negative zone, indicating the start of the first impulse. Cumulative Delta reveals a large number of market sellers who are unable to push the price below the middle of the first bar of the trading session. If you see this in the chart, it signifies that limit purchase orders are absorbing market sell orders. If’managed money’ buys, it may be anticipating a price hike. When both indicators move into the green zone, it is safer to open a long position in point 2. Aggressive traders, on the other hand, can enter a trade sooner if they spot the first grey dot and recognize that market sells cannot pull the price down.
Here’s another example. As the following filter, we’ll attempt the Dynamic Levels Chanel indication. With green and red arrows, this indication depicts the levels at which the price attempted to go outside the Value Area. Arrows are not complete signals for entering trades; but, if the price moves up or down concurrently with the Value Area over a lengthy period of time, it reinforces the local trend.
Consider the following 15-minute S&P 500 index futures (ESH1) chart.
The Squeeze Momentum graph depicts an up impulse from the black vertical line. However, the highs of the green histogram become smaller, which may cause traders to terminate long positions early and miss out on the entire rise.
The American trading session began with point 1. Levels of Variability Chanel always displays green arrows, indicating that the price is rising along with the Value Area. The day obviously developed as a trend one, and long bets would have resulted in a significant profit for traders.
The black horizontal level represents the end of the American trading session as well as a local high. The following day, this level was the resistance level first, and then the support level.
Near number 2, the SM indication dots become grey, and a little breakout begins. Despite the grey dots on the Squeeze Momentum indicator, however, the price failed to consolidate above the Value Area on the high number 3 and rolled back to the level. The same thing happened on the high number 4, and the price dropped again. Working with a technical indicator alone in this trading environment is quite challenging. However, when we see what is going on in the Value Area, we can make more informed decisions.
Conclusion
The TTM Squeeze indicator examines both volatility and momentum in order to identify trading opportunities based on variations in volatility in a security. The indicator’s volatility component (the squeeze dots) predicts possible breakouts following periods of low volatility. The momentum histogram predicts the anticipated direction of the breakout and can assist in determining exit positions.
Traders should utilize the TTM Squeeze indicator in conjunction with other indicators and analysis methodologies, as they should with all indicators.