Trading the Bollinger Band Squeeze

Carter uses 20 periods for the moving average and ATR, and 1.5 for the ATR multiplier, but these parameters can be adjusted as well. The TTM Squeeze indicator also uses a momentum oscillator to show the expected direction of the move when the squeeze fires. After the surge above 40, the stock again moved into a consolidation phase as the bands narrowed and BandWidth fell back to the low end of its range. Another setup was in the making as the surge and flat consolidation formed a bull flag in July.

It did not enjoy much followthrough before meandering sideways again. From a price action perspective, you can interpret this arrested bearish thrust as a sign that the bulls were still in control. Squeezes describe different types of financial and economic situations in which market pressures affect the value of investments or the availability of credit, among other impacts. As history has shown, squeezes demonstrate just how sensitive financial markets can be, from the Great Depression in the 1930s to GameStop and Silicon Valley Bank in the 21st century. The collapse of Silicon Valley Bank in March 2023 illustrated several types of squeezes.

A short squeeze can make the price of a relatively unknown stock skyrocket over a short period. Backtests reveal that short squeezes are rare and it’s very difficult to find any short squeeze strategy. However, we can shed some light on some general principles about a short squeeze trading strategy. For example, if a stock has 500 million shares outstanding and 50 million is lent out for shorting, it means that the short interest ratio is at 10%. Thus, short sellers add fuel to the fire and make short squeezes extremely painful for those short.

A Smarter Way to Trade the Squeeze

An upside bank break is bullish, while a downside band break is bearish. Note that narrowing bands do not provide any directional clues. They simply infer that volatility is contracting and chartists should be prepared for a volatility expansion, which means a directional move. Naked short selling is short selling a stock without first borrowing the asset from someone else. It’s the practice of selling short shares that have not been affirmatively determined to exist. Securities and Exchange Commission , naked short selling is illegal.

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• The Bank Term Funding Program is a Federal Reserve program that offers collateralized loans to banks to shore up banking liquidity in the aftermath of the Silicon Valley Bank collapse.
• Then a bull case for the company—that it could return to profit in a couple of years—started getting around in early 2021.

But there are also many heavily shorted stocks that then keep falling in price. As noted, short sellers open positions on stocks that they believe will decline in price. However sound their reasoning, a positive news story, a product announcement, or an earnings beat that excites the interest of buyers can upend this. Short sellers zero in on a stock that they think is overvalued by the market. For example, Tesla Inc. captured the enthusiasm of many investors with its innovative approach to producing and marketing electric vehicles.

¿Qué causa un short squeeze?

A quantified strategy needs very precise trading rules and settings. We decided it was not worth the time to spend time backtesting a short squeeze strategy. There are times when the prices of stocks move as a result of what other investors are doing rather than based on the company’s underlying business fundamentals. When an investor decides to short a stock, they are betting that the price will decline in the short term. But if the opposite occurs, the only way for them to close their position is to go long by purchasing shares of the stock.

Carter uses the standard Bollinger Band settings of 20 periods and 2 standard deviations, but these parameters can be adjusted to meet your trading needs. Commodity and historical index data provided by Pinnacle Data Corporation. Unless otherwise indicated, all data is delayed by 15 minutes. The information provided by StockCharts.com, Inc. is not investment advice. Before breaking out, the stock opened below the lower band and then closed back above the band.

The formula for linear regression is beyond the scope of this article, but it essentially looks for the “line of best fit” given the available data. The momentum histogram values show how far above or below the average the price is expected to be. Second, calculate the SMA of the close for the specified number of momentum periods (so by default, a 20-period SMA of price). Your tool kit to trading the squeeze like a pro, complete with indicators, scans, and powerful data-driven backtesters. While it can be a real challenge to forecast future prices and price cycles, volatility changes and cycles are relatively easy to identify.

• This has allowed less time in front of the computer without an adverse affect on returns.
• “Naked” means that you have not borrowed the shares, thus creating artificial increase in the amount of outstanding shares.
• If you are already familiar with Keltner Channel, you might prefer this technique.
• The stock may be heavily shorted for good reason, such as a dismal future outlook.

After a surge in March, the stock consolidated with an extended trading range. SBUX broke the lower band twice, but did not break support from the mid-March low. Notice that this pattern formed after a surge in early March, which makes it a bullish continuation pattern. SBUX subsequently broke above the upper band, then broke resistance for confirmation. When a heavily shorted stock unexpectedly rises in price, the short sellers may have to act fast to limit their losses.

Top biggest short squeeze in history

Furthermore, short squeezes are random and we fail to see any clear pattern. We tried backtesting several short squeeze strategies but we failed to produce any tangible positive results. The Volkswagen short squeeze, one of the most popular in history, took about 31 trading days to climax. The GameStop short squeeze lasted less than a month, even though the stock later rallied for several months after gaining popularity from the short squeeze. Short selling is difficult because you can only make 100% while the losses theoretically can be unlimited.

If you follow it too closely and don’t consider the risks—and limit them—you could stand to lose. Do your research, take care of your capital, and know when you should make an exit point, if necessary. This bullish trend bar confirmed the breakout from the Squeeze.

By using non-collinear https://1investing.in/s, an investor or trader can determine in which direction the stock is most likely to move in the ensuing breakout. With a little practice using your favorite charting program, you should find the Squeeze a welcome addition to your bag of trading tricks. It generally depends on the volume of shorted shares, the short interest ratio, the average daily trading volume in the stock, and the broker’s eagerness to recall the borrowed shares. When a large number of traders are forced out of their positions due to sudden rising or falling prices, it is known as a market squeeze. Some high-volume markets are more susceptible to squeezes than others, but the general assumption is that it can happen in any market at any time. Speculators and traders who have short positions in a stock will face heavy losses if the stock undergoes a short squeeze.

Determining Breakout Direction

Despite this bullish pattern, SBUX never broke the upper band or resistance. Instead, SBUX broke the lower band and support, which led to a sharp decline. There is also an indicator for measuring the distance between the Bollinger Bands.

Both indicators are symmetrical, meaning that the upper and lower bands or channel lines are the same distance from the moving average. That means that we can focus on only one side in developing our indicator. The second limitation is that the squeeze is not a directional indicator. This is not much of an issue if you’re trading manually but does have an impact if you develop an automated strategy. This means that using the typical default values, 95% of the closing prices fall within 1.5 ATR’s of the moving average, and that is what constitutes a squeeze. Whenever market volatility decreases and our strong trends begin to slow, we see the Bollinger Bands tighten while the Keltner Channel remains relatively constant.

That strategy has helped boost sales with revenue in the first quarter reaching $23.3 billion, a 24% pop from the same period last year. It indicates a way to close an interaction, or dismiss a notification. Trading in choppy markets can be hazardous to your trading account. The faster you can determine this market state, the faster you can sit on your hands and preserve your trading capital.

First the bank faced a profit squeeze due to poor returns from its investment portfolio. Tesla reported Wednesday net income of $2.51 billion in the first quarter, a 24% drop from the same period last year as the company’s EV price-cutting strategy cut into profits. CFD accounts provided by IG Markets Ltd, spread betting provided by IG Index Ltd and share dealing and stocks and shares ISA accounts provided by IG Trading and Investments Ltd.

For example, if a stock has 1 million shares sold short and its average daily trading volume is 100,000 shares, then the days to cover would be 10 days. That is, it would take 10 days for short sellers to cover their entire short position based on the average daily volume of shares traded. In general, the higher a stock’s days-to-cover figure, the more susceptible it may be to a short squeeze. If days to cover for stock A and stock B are two days and 20 days, respectively, then stock B may be more vulnerable as a short squeeze target.

TSLA Broken Wing Butterfly Trade Idea

Notice that a piercing pattern formed, which is a bullish candlestick reversal pattern. This pattern reinforced support and the follow-through foreshadowed the upside breakout. The example above shows Intuit with a Bollinger Band Squeeze in September and breakout in early October. During the squeeze, notice how On Balance Volume continued to move higher, which showed accumulation during the September trading range. Signs of buying pressure or accumulation increased the chances of an upside breakout. Everyone who shorted the stock between $9 and $5 is now in a losing position.

Contrarian investors who have built up long positions in the stock in anticipation of a short squeeze will benefit as the stock price climbs. Active traders will monitor highly shorted stocks and watch for them to start rising. If the price begins to pick up momentum, the trader jumps in to buy, trying to catch what could be a short squeeze and a significant move higher.

Hence, you get a worlds largest companies 2019 Band Squeeze if the market displays low volatility when compared to its recent history. On top of that, before the Bollinger Squeeze, there was an existing upwards trend. Counter-trend breakouts, like the one in this example, have a lower probability of success. The chart below shows a failed Bollinger Bands breakout followed by a successful one. Here, the bottom panel showed that Band Width had dropped to its 120-day low.

From there, it was a snowball effect of retail investors buying stock and call options. The price increase drove out some short sellers and attracted various big-name investors and public figures, such as Elon Musk and venture capitalist Chamath Palihapitiya. Cory is an expert on stock, forex and futures price action trading strategies.

Discover how to trade the markets

Additionally, the price of most assets over time goes up so you are facing a headwind when shorting. Aliquidity squeeze occurs when a financial event sparks concerns among financial institutions, such as banks, regarding the short-term availability of money. These concerns may cause banks to be more reluctant to lend out money within theinterbank market. As a result, banks will often impose higher lending requirements in an effort to hold onto their cash reserves. This cash hoarding can cause theovernight borrowing rate to spike significantly above the benchmark rate, and as a result, the cost of borrowing will increase. Profit squeezes, credit squeezes, and short squeezes are all examples of when market pressure accelerates or intensifies a financial situation.

Because the Bollinger Band Squeeze does not provide any directional clues, chartists must use other aspects of technical analysis to anticipate or confirm a directional break. In addition to basic chart analysis, chartists can also apply complimentary indicators to look for signs of buying or selling pressure within the consolidation. Momentum oscillators and moving averages are of little value during a consolidation because these indicators simply flatten along with price action. Instead, chartists should consider using volume-based indicators, such as the Accumulation Distribution Line, Chaikin Money Flow, the Money Flow Index or On Balance Volume . Signs of accumulation increase the chances of an upside breakout, while signs of distribution increase the chances of a downside break. Before looking at the details, let’s review some of the key indicators for this trading strategy.

This can cause the stock’s price to further increase, resulting in further action by short sellers. The average true range of price bars is calculated and the channel lines are drawn a fixed number of ATR’s above and below a moving average of closing prices. Days to cover measures the expected number of days needed to close out a company’s shares outstanding that have been shorted.