The idea
Bollinger Bands sit two standard deviations above and below a 20-period average, so they widen when price is volatile and narrow when it is quiet. Quiet spells do not last: volatility moves in cycles, and the tightest bands in months often come just before a large move.
The squeeze strategy watches for that pinch, then follows whichever way price breaks: a close above the upper band is a buy, a close below the lower band a short.
Watch it play out
Step by step
The rules
Setup
- Bollinger Bands (20, 2) are at their narrowest of the last few months (lowest band width).
Entry
- Buy on a close above the upper band, short on a close below the lower band.
Stop-loss
- At the middle band (the 20 average), or the other band for more room.
Target
- 2R, or trail the stop at the middle band while the bands keep widening.
Filters that help
- Volume rising on the breakout candle adds confidence.
- Be wary of the first break after news: a 'head fake' that reverses is common.
Why it can work
Low volatility means buyers and sellers are in balance and positions are building up. When the balance breaks, stops and new orders push price quickly, and the bands expand behind it.
The squeeze says a move is likely, not which way. That is why the entry waits for the close outside the band rather than guessing.
Worked example
A stock has gone quiet for three weeks and its bands are the narrowest of the year. It closes at $108.90, above the upper band; the middle band is at $108.20, so the stop goes there, 70 cents away.
A 2R target is $110.30. Risking $100, 142 shares fit.
When it works, when it fails
Works best
Before scheduled catalysts and after long, tight bases, in markets that trend once they move.
Struggles
On head fakes: price pops out of one band, reverses and runs out of the other. Also in markets that simply stay quiet for longer than expected.
Common mistakes
- Guessing the direction before the break.
- Calling any narrowing a squeeze: it should be the narrowest in a long while.
- Using a stop so tight that ordinary noise after the break stops you out.
Variations
- Keltner squeeze
- The squeeze defined as Bollinger Bands moving inside Keltner Channels, popularised in some charting tools.
What the evidence says
Evidence: Popular, untestedWidely used, but no rigorous public testing. An idea to test yourself.
John Bollinger described the squeeze as a sign of low volatility that tends to precede higher volatility. That part is a well-observed property of markets.
Whether trading the squeeze breakout has an edge after costs has no rigorous public study we can point to. Treat it as a structure to test, not a proven strategy.
Questions
- What settings are used for the squeeze?
- The standard 20-period average with bands two standard deviations away. The squeeze is the band width at its lowest for roughly the last six months.
- Which way will the squeeze break?
- The squeeze does not say. The strategy waits for a close outside a band and follows it.
- What is a head fake?
- A break out of one band that quickly reverses and becomes the real move in the other direction. It is the squeeze's most common trap.
- How is band width measured?
- Band width is the distance between the upper and lower band divided by the middle band. A squeeze is when that number is at its lowest for a long stretch, commonly around six months of candles.
- Does the squeeze work on crypto?
- Crypto goes through the same quiet and wild spells, and the squeeze is popular there. Crypto also trades around the clock and breaks out hard, so stops need room and position size should follow the wider stop.