What’s A Squeeze Trade?

The Squeeze trade is an extremely simple yet effective trade setup. It can be applied to Stocks, Indexes, Options, Futures, and Forex markets. It doesn’t matter what you’re looking at, the squeeze play will work anywhere. It can also be applied to any timeframe successfully, including 1 minute or 5 minute charts for day trading, all the way up to 1 month charts for long term investments.

In general, the squeeze is an indication of volatility compression in the markets (a stock is consolidating and getting ready for a big move). It visually represents when a market turns from consolidating to trending. When a squeeze indicator fires off it provides the experienced trader with a unique opportunity to take profits while minimizing risks.

Let’s take a look at how the squeeze trade works.


Above is a Daily chart of AAPL where 1 bar is 1 trading day. The two red lines represent Bollinger Bands (on default settings in Think or Swim) and the 2 green lines represent the Keltner Channels. The middle band in both of these studies was removed to de-clutter the image.

To find a squeeze trade we look for consolidation periods in the market where there is low volatility and the market is building up energy to make a big move either up or down. We can see the beginning of a consolidation period when the Bollinger Bands enter completely inside of the Keltner Channels, as indicated at the point marked “1”. This is not a signal to buy the stock, this is merely a warning sign that at some point in the near future the market will provide us with a buy signal meaning it’s time to enter a trade and take profits.

At point 2 that buy signal occurs. You can see how at point 2 the Bollinger Bands exit the Keltner Channels while the stock price has a strong upward momentum. This is a bullish squeeze. We enter the trade and set our trailing stop loss wide enough that it filters out any market noise, but keep it tight enough that should a trend change occur we are immediately taken out of the trade.

Following the squeeze trade setup this trade initiated a buy signal at $97.65 and reached a maximum of $112.3 before reversing its upward trend. That’s a gain of 15% for stock traders, and nearly 400% profit for Option Traders.

When a squeeze fires off it will typically multiply the Average True Range (ATR) of a stock by 2-4 times its normal value. When this happens, traders using candlestick patterns, RSI, or pivot point indicators get destroyed. If a squeeze is in play, all other bets are off. The squeeze is like a freight train that overpowers almost all other technical indicators out there, and that’s why it’s the primary focus of the Market Prowler Newsletter.


Squeeze Trade Examples

Want to see some examples of professionally executed Squeeze Trades? Check out the Squeeze Trade Examples page to see this powerful trade setup being used. We walk you through how the squeeze can be used in day trading, swing trading, and investing.


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