To The Moon

As investors, we are always learning on how we can find the best combination of indicators for our trading strategy.

This is for to gain a competitive edge. One such tool that has garnered attention in recent times is the Squeeze Momentum (SM) Indicator.

Combining the concepts of volatility and momentum, the SM Indicator offers a unique perspective on market conditions, aiding us in making more informed decisions.

In this article, I will be sharing the intricacies of the Squeeze Momentum Indicator, exploring its mechanics, applications, and potential benefits.

I will be also sharing an example of how we can use it.

Understanding the Basics

The Squeeze Momentum Indicator, also known as the SM Indicator or simply the Squeeze Indicator, was developed to provide insights into market volatility and potential impending price movements. The concept behind this indicator originated from the work of trading guru John Bollinger, who introduced the concept of Bollinger Bands in the 1980s. Bollinger Bands consist of a moving average and two bands plotted above and below it, which expand and contract based on market volatility.

The SM Indicator builds upon the principles of Bollinger Bands by introducing the concept of "squeezes." A squeeze occurs when the Bollinger Bands contract, signifying a period of low volatility. This contraction is often followed by a breakout, where volatility increases, and price movement becomes more significant.

Mechanics of the SM Indicator

The Squeeze Momentum Indicator incorporates three main components to generate its insights:

1. Bollinger Bands: As mentioned earlier, the Bollinger Bands consist of a moving average (typically a simple moving average) and two bands plotted above and below it. The distance between the bands expands and contracts with market volatility.

2. Keltner Channels: The Keltner Channels are similar to Bollinger Bands but use Average True Range (ATR) to determine band width. ATR measures market volatility and is often used to assess potential price ranges.

3. Momentum Histogram: The momentum histogram is plotted beneath the main price chart and represents the difference between the Bollinger Bands and Keltner Channels. Positive values indicate a squeeze (low volatility), while negative values suggest a period of higher volatility.

Interpreting the SM Indicator

The Squeeze Momentum Indicator generates signals by combining the information from the Bollinger Bands, Keltner Channels, and momentum histogram. Traders often look for the following signals:

1. Squeeze Signal: When the momentum histogram crosses above zero and enters positive territory, it signifies a squeeze. This indicates that volatility is contracting, and a potential price breakout might be imminent.

2. Release Signal: The release signal occurs when the momentum histogram crosses below zero, indicating that the squeeze period is ending. This suggests that the market might experience a significant price movement.

3. Bullish and Bearish Divergence: Traders also pay attention to divergences between the SM Indicator and price movements. Bullish divergence occurs when prices make lower lows while the momentum histogram makes higher lows. Bearish divergence is the opposite, with higher highs in prices and lower highs in the momentum histogram.

Example of Squeeze Momentum Indicator Chart - How to read them

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 color changes into dark-green colour when the price starts to increase and, consequently, red colour changes into dark-red colour when the price starts to decrease.

Bollinger Bands and Keltner Channel Chart

I am using the stock, $AbbVie(ABBV)$ as an example here, as you can see 22-30 June, the Bollinger Band is inside the Keltner Channel, so the Squeeze Momentum indicator should show a black dot.

You may reference to the Squeeze Momentum indicator below to see if you can notice it.

Squeeze Momentum Indicator Chart

As we can see clearly that between the 22-30 June period, indeed, we are seeing black dots appearing, it lasted for a while before we see that prices start to surge in early July.

In order for us to find out if the stock will be going to surge, we can look at the histogram bar, as you can see it changes from bright-green to dark-green.

Likewise, if we notice that the bar start to change from red to dark-red, price start to decrease.

Some suggestion is to use this indicator with ADX (Average Directional Index).

I will share more in another article on how this can done.

Applications and Benefits

The Squeeze Momentum Indicator offers several potential benefits to traders:

1. Identifying Volatility Contractions: The indicator excels in highlighting periods of low volatility, which are often followed by periods of increased price movement. This can aid in anticipating potential breakout or breakdown scenarios.

2. Confirming Trends: By confirming trends with momentum and volatility, the SM Indicator can help traders filter out false signals and enhance the accuracy of their decisions.

3. Enhanced Timing: Traders can use the indicator to fine-tune their entry and exit points, capitalizing on potential high-momentum moves.

4. Versatility: The SM Indicator can be applied to various markets and timeframes, making it suitable for day traders, swing traders, and long-term investors alike.

Summary

The Squeeze Momentum Indicator offers a unique blend of volatility and momentum analysis, providing traders with valuable insights into potential market movements.

By identifying periods of low volatility (squeezes) followed by potential breakouts, the SM Indicator can help us make more informed decisions.

However, like any trading tool, it is important to remember that no indicator is foolproof, and risk management remains crucial. As with any new trading tool, we should thoroughly test the Squeeze Momentum Indicator in various market conditions before incorporating it into our trading strategy.

If you like to know more about technical analysis and the various indicators, do follow me and I will be sharing my analysis on the indicators for building my different trading strategy for different groups of assets.

$Affirm Holdings, Inc.(AFRM)$ $Tesla Motors(TSLA)$

No indicators should be uniform for all kinds of assets, this is what I have learned so far.

Appreciate if you could share your thoughts in the comment section whether you find this article useful and do let me know whether the Squeeze Momentum indicators can be useful to you.

@TigerStars @Daily_Discussion @TigerWire appreciate if you could feature this article so that fellow tiger would benefit from my investing and trading thoughts.

Disclaimer: The analysis and result presented does not recommend or suggest any investing in the said stock. This is purely for Analysis.