24# Squeeze Breakout

The Squeeze Play Breakout is a volatility setup. It actually begins with an unusual lack of volatility for the market that you are trading. In other words, a market is trading with much less volatility than is usually the case judging by the market's historical data. Key point: The Squeeze Play relies on the premise that stocks and indexes fluctuate between periods of high volatility and low volatility. When periods of low volatility occur, a market should eventually revert back to its normal level of volatility. My strategy uses two indicators applied to Daily Bars: The well-known Bollinger Bands and... ...the much less well know Keltner Channels. With both the Bollinger Bands and Keltner Channels, I use the standard default settings that are used on vast majority of trading platforms that I've seen: Bollinger Bands: Length 20, Standard Deviation, 2 Keltner Channels: Length 20. There are two versions of the Keltner Channels that are commonly used. I use the version in which the bands are derived from "Average True Range." When I have looked at how Keltner Channels are configured in different charting programs, I've noticed that there can be some minor variations. You should not only be sure that you're using the formulation that uses Average True Range, but also that the center line is the 20-period Exponential moving average. Okay, let's get into the guts of of both of these indicators so that you'll understand why the combination of these two indicators is so effective.

Bollinger Bands were made famous as a trading tool by John Bollinger in the early 1980s. A Bollinger band tells you the amount of volatility there is a given market relative to the recent past. When a market is very volatile relative to the recent past, the Bollinger band will expand. When a market is going through a period of low volatility relative to the recent past, the Bollinger band will contract