How to Use the Squeeze Momentum Indicator to Time Trades

The Squeeze Momentum trading indicator (SMI) is a volatility indicator designed to identify periods of low volatility when a breakout is likely to follow. In simple terms, it spots squeeze conditions those moments when the market just entered a squeeze before a sharp price movement occurs.

Imagine squeezing a spring between your fingers. The more pressure you apply, the more potential energy builds up. When you finally release it, the spring explodes outward. The Squeeze Momentum Indicator, originally based on John Carter’s TTM Squeeze Indicator, works in a similar way. It detects when the market is “squeezing” into a tight range and signals when that tension is about to be released, either to the upside or downside.

For systematic traders, this is gold. It means the ability to use the Squeeze Momentum Indicator programmatically, rather than guessing based on gut feel. It offers an edge that can be tested, measured, and replicated crucial for those who follow trading strategies with strict rules.

The TTM Squeeze Indicator, popularized by John Carter, combines Bollinger Bands and Keltner Channels to detect when price action is entering a squeeze condition. This indicator is widely used in TradingView, NinjaTrader, and other charting platforms.

The mechanics:

• A squeeze is said to be in effect when Bollinger Bands move inside the Keltner Channels. This is marked by a red dot on the histogram.

• A squeeze release occurs when the Bollinger Bands expand outside the Keltner Channels. This is marked by a green dot.

• The momentum histogram represents momentum shifts—positive bars indicate bullish market momentum, while negative bars suggest bearish pressure.

Traders use this indicator to anticipate breakout trades. When a squeeze fires with increasing momentum periods, it can indicate the start of a strong directional move.

Here’s an example: A trader notices one or more red dots appearing on a daily chart of a stock that’s been consolidating. Over the next few days, the histogram turns green and increases in size. This signals a momentum shift, making it a potential buy or sell opportunity.

Unlike traditional volatility indicators like Bollinger Bands, the Squeeze Momentum Indicator considers both volatility and momentum, making it a popular indicator for spotting breakouts more precisely.

Many traders see a squeeze and jump in blindly, which often leads to trading that contains substantial risk. However, systematic traders use clear strategy logic to make informed trading decisions. 

Backtesting the Squeeze Momentum Indicator for NinjaTrader 8 allows traders to determine:

• Whether buying after a squeeze release leads to high-probability trades.

• How many 8-10 bars after a squeeze is the best time to enter.

• The ideal stop loss and trailing stop for optimal risk-reward.

For example, a trading strategy based on backtested data might be:

“Enter long on the first green dot after a squeeze if the histogram is rising and price is above the 50-day EMA.“

If this strategy uses sound statistical data, it’s no longer an opinion—it’s a repeatable trading strategy. One study showed that entering 1.5 bars after the squeeze release improved trade efficiency while reducing false signals.

Like any technical indicator, the Squeeze Momentum Indicator is not foolproof. Here are some pitfalls:

• Assuming direction: Entering without confirming price momentum or trend direction can lead to false signals.

• Overfitting: Optimizing indicator settings too tightly to past data may not hold up in live trading.

• Ignoring market context: Using the Squeeze Indicator during news events or periods of high volatility can cause whipsaws.

Traders can overcome these issues by combining the Squeeze Momentum Indicator with trend filters (like moving averages), momentum confirmation (like RSI or MACD), and proper risk management rules. Backtesting different setups can help identify the right combination that aligns with your trading style.

Here’s how traders can use the squeeze for smarter trades:

Strategy Example:

• Timeframe: Daily

• Entry: Buy when the first green dot appears after a squeeze, and the histogram is rising for 2+ days.

• Filter: Only enter if the 20-day EMA is above the 50-day EMA.

• Exit: Sell when the histogram declines or RSI crosses below 70.

Best Market Conditions:

• Works well in trending markets after consolidation.

• Avoid during range-bound or news-driven volatility spikes.

Combine With:

• Volume spikes for stronger confirmation.

• ADX (Average Directional Index) to measure trend strength.

• Multi-timeframe analysis (e.g., checking a squeeze condition on both daily and 4-hour charts).

The Squeeze Momentum Indicator, originally based on LazyBear’s work, is a technical analysis tool that helps traders identify breakout opportunities with precision. However, no one indicator guarantees success—trading requires a combination of Bollinger Bands, momentum oscillators, and strategy logic.

If you’re serious about momentum trading, it’s time to move beyond just watching indicators. Indicators can be used as a guide, but trading strategies must be tested, refined, and followed systematically.

Learn how to use the Squeeze Momentum Indicator as part of a rules-based trading strategy in The Trader Success System—your step-by-step guide to profitable systematic trading.