SM Squeeze Indicator Part 1.

November 21, 2012 by  
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Hello, my name is Steve Margison, author of The Book on Forex Trading. In this video I want to introduce to you my new indicator the SM Squeeze Indy. This video is part one of a series.

The Squeeze is, in my opinion, the best way to get positioned for the big market moves. Its full name is the Bollinger Band Squeeze.  The SM Squeeze Indy tells you when a market is transitioning from low volatility to high volatility.  In other words it tells you when the market is going to switch from an oscillating market (sideways) to a trending market and vice versa. The markets spend a lot of time in trading ranges, building up energy for their next major move. By the time the move fires off, it is usually out of the blue and violent, leaving many day traders behind.

The markets never break when they are expected to, and they will do so only when they are good and ready, usually when the greatest number of traders are unprepared. So as traders we need to be positioned ready for when the market volatility increases. The SM Squeeze Indy helps us to be prepared for a market move.

Volatility can be measured using Bollinger Bands (red bands in the chart below) and Keltner Channels (yellow bands).  Periods of low volatility are identified when the Bollinger Bands move closer together and high volatility when the Bollinger Bands move further apart. How do we know though when the bands are narrow enough to qualify as low volatility? The answer is during periods of low volatility; in sideways moving markets the Bollinger Bands will contract to move inside the Keltner Channels. That is our measure of low volatility. The markets are now taking a breather (maybe a big breather), building up steam for their next move.

The signal to trade is when the Bollinger Bands move back outside the Keltner Channels. We then need a momentum indicator to tell us whether to trade long or short. Putting the Bollinger Bands and K Channels on a chart makes it look messy and not easy to read.

SM- Forex has developed an indicator called the SM Squeeze Indy that shows red dots when the Bollinger Bands are inside the Keltner Channels (low market volatility) and when the red dots turn to green dots the Bollinger bands have moved outside of the Keltner Channels (higher volatility). A turquoise histogram suggests a long trade and a red histogram a short trade.

The chart above shows the Daily chart of the AUD/USD. You can see during the time the dots are red on the SM Squeeze Indy the Bollinger bands are inside the Keltner Channels. The dots then turn green, the momentum is red and hence a short trade is taken. That trade was worth 200 pips or so.There are two short trades, one in March and one in May 2012 and both successful.

The SM Squeeze Indy works well on all timeframes.  It is very useful on higher timeframes because for instance if a Squeeze fires off long on the 1 hour chart it will prevent me from taking trades short on lower timeframes until that Squeeze has played out.  Likewise if a weekly Squeeze fired off long I would not take short trades on the daily or 4 hour charts. Also as a day trader I’ve learned one golden rule.- Never fight the 5 minute Squeeze.

A typical good Squeeze usually lasts no more than 7 bars.  So that’s 7 minutes on a one minute chart and 7 days on a Daily chart. As long as the momentum histogram is turquoise on a long trade (on my Indy) the Squeeze is strong. When the histogram turns blue the momentum is reducing and the Squeeze is over. For a short trade a red histogram shows the Squeeze is strong but when it turns orange the Squeeze is over for now.

Finally, you can’t just blindly take Squeezes as they come.  You still have to look at the time or day, ADR, support and resistance and all the other things a trader has to do.  I have supporting Indys that confirm my Squeeze trades. – More on this in Part 2. You can watch the video to this post here.

Steve Margison author of “The Book on Forex Trading.”







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