Bollinger Squeeze

Bollinger Band Squeeze

  A period of low volatility often precedes a strong move by a stock.  The ensuing move may be a downward thrust or an upward thrust.  Traders monitor stocks that have a Bollinger Band squeeze (showing that the stock is experiencing a period of low volatility), waiting to see if the expected breakout is to the upside or downside.  A “squeeze” is taking place when the upper and lower Bollinger Bands are close to each other relative to their recent separation.  After a squeeze, a thrust above the upper Bollinger Band is seen as bullish and a thrust below the lower Bollinger Band is seen as bearish.  If the stock thrusts above the upper Bollinger Band, the “UP” signal is generated.  If the stock thrusts below the lower Bollinger Band, the “DN” alert is generated.  Because what constitutes a good Bollinger Band squeeze is relatively subjective, we add the following notes. 

Sometimes, our way of looking at a chart convinces us that a squeeze has not taken place even though it has.  For example, we tend to view magnitude of separation by noting distance along a perpendicular to the trend of a rising channel rather than perpendicular to a horizontal line. 

The scanner is intended to cut down on the number of stocks we have to review, but we don’t want it to do our thinking for us.  The user has an opportunity to examine the squeeze relative to a stock’s squeeze pattern and relative to the current context.  There are hundreds of stocks that penetrate a band without any squeeze (this is what you get at other Web sites).  With this filter, we are provided with a handful of stocks to review (the best candidates) rather than hundreds (most of which are of no interest at all).  Of the relatively small list we get we will reject a few because the squeeze or context is not acceptable (for us).  

Some signals are generated even though the band penetration did not just take place but took place within the last week or so.  If the bands still have narrow separation relative to the average separation before the squeeze, we are still interested in reviewing them. 

A squeeze does not have to last for a week, a month, or any other set period to mean a squeeze has taken place.  If the two bands narrow their separation for even a day, that is a squeeze.  Why?  the Bollinger Band equations are based on a 20 day measurement.  When a squeeze is registered, it is based on data covering 20 days and is plotted on a chart relative to the period before that.  Some traders consider only squeezes that have lasted for at least one or two weeks to be worth while.  Others consider any squeeze to be worth while.  Rather than filter out all squeezes that have lasted less than several weeks, we have decided to show even those of short duration so that subscribers can decide for themselves which are actionable.  Our own traders have had great success acting on very short-term squeezes.  Of course, the context of a squeeze is extremely important.    

The standard approach is to look for squeezes in which the band separation is less than at any time in the previous 6 months.  We focus more on the amount of squeeze that is taking place rather than how long it has been since band separation has been that small.  The latter will flag stocks with the slightest contraction in band separation if the separation between the bands is the narrowest it has been for 6 months.  It is our experience that very good alerts can be based on a significant narrowing of band separation, regardless of how long it has been since the last separation of comparable magnitude.  Rather than have the computer automatically eliminate stocks that have had a greater squeeze within the last six months, we want to examine the patterns for ourselves.  We really don’t care very much if there has been a tighter squeeze within the last 6 months.  We have found that sufficiently tight squeezes (regardless of how long it has been since the last tighter one) are well worth our attention.

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