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How to Trade the Squeeze Indicator

AvatarBen Sturgill ·

Make no mistake about it, the market is hot.

This makes it difficult to sometimes locate spots to enter trades.

After all, you want to be disciplined, but you also don’t want the stock to “run away” from your price.

What do I do to try to overcome these common problems traders face in a strong trending market?

I use the TTM Squeeze indicator. It allows me to pinpoint my entries and trade with confidence.

And today I’m going to give you a lesson on how to get the most out of it.

 

The TTM Squeeze Indicator

The TTM indicator measures the relationship between two popular studies: The Bollinger Bands and Keltner’s Channels.

This indicator allows us to identify periods of consolidation and anticipate when momentum is about to kick in.

Additionally, it helps the trader to not only identify periods of consolidation but also indicate which direction the trade is about to take for its next move.

There are three major components to the TTM Squeeze Indicator:

 

  1. Bollinger Band
  2. Keltner Channel
  3. Zero Line


Each component plays a key role in this unique indicator.

The Squeeze indicator finds sections of the Bollinger Bands study which fall inside the Keltner’s Channels.

When the market finishes a move, the indicator turns off, which corresponds to bands having pushed well outside the range of Keltner’s Channels.

For myself, I primarily focus on the Zero Line and how price reacts to changes in either the direction of momentum or volatility increasing.

I find this gives me the clearest information to help identify new trends, changes in momentum, and increased volatility.

Let’s take a look at some SPY charts and break down what the indicator is telling me.

 

SPY Weekly:

 

 

Looking at the above image of the SPY on the Weekly timeframe, the line on the right points to the first bar that is breaking above the zero line.

This is telling us that SPY could continue higher in the upcoming weeks.

As a daily timeframe trader, it’s not wise to go against what the macro trend is indicating. 9/10 times a trader suffers most of their losses by ignoring a very common phrase, “the trend is your friend”.

 


SPY Daily:

 


Looking at the above image of the SPY on the Daily timeframe, the line on the left points to the first bar that is breaking above the zero line.

This is telling us that SPY could continue higher.

This point on the zero line is interesting to me for two reasons.

First, it’s indicating that there is a change in momentum from a negatively trending market to possibly a positive trending market.

Secondly,  there was no period of consolidation, or red dots, indicating low volatility and consolidation in the price action.

Why is this interesting?

Well, as a daily trader and swing trader of the markets it’s important that I know what the trends are on top of what direction they are going to be heading towards.

Get any of these wrong, and you are facing potentially major losses on the trades.

There are some instances where we can trade daily time frame based on hourly price movement

 


SPY Hourly:

 


Just as this indicator pointed to higher markets on both the weekly and daily timeframes, the hourly chart is also pointing to higher prices.

This indicator triggered overnight Sunday into Monday this week, pointing to higher prices and continued momentum to the upside.

Another key thing to remember is looking “up” in timeframes.

You would look up to the weekly chart from the daily chart, you would also look up to the daily chart from the hourly chart.

Why do this?

This is important and helps to maintain the correct direction you are trying to trade in.

Many times I hear traders that are long the markets on the daily timeframe and are short the markets on a 1-hour time frame.

Now I am not saying that this is not a tactic that the pros use, but to proceed with caution as this can lead to confusion and easily overwhelm any beginning trader.

Pro Tip: Lower time frames are typically used as entry and exits to support the higher time frame when swing trading.How to use the TTM indicator in 3 easy steps:

 

  1. Find areas of consolidation, the red dots
  2. Look for momentum to break out in direction of trade
  3. Confirm higher time frame


To conclude, I just anticipate a move above the zero line and place trades in the options markets for the direction I think the market is heading.

Study this lesson again, and see if you can put any of this knowledge to use come next week.

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