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RSI with Bollinger Bands Chaikin Oscillator: A Comprehensive Guide
3 mins read

BB/KC Squeeze: A Powerful Indicator for Trading Range Breakouts

Introduction

The BB/KC Squeeze is a valuable technical analysis tool for traders seeking to capitalize on breakout opportunities in tight trading ranges. This indicator combines the volatility and momentum components of Bollinger Bands and Keltner Channels to help traders predict when a price might break out of its current range.

BB KC Squeeze

BB/KC Squeeze Overview

Bollinger Bands

Bollinger Bands, developed by John Bollinger, are a technical analysis tool that measures price volatility. They consist of a moving average (typically a 20-day simple moving average) and two standard deviation bands, one above and one below the moving average. As the bands widen, it indicates increasing volatility, while narrowing bands suggest decreasing volatility.

Keltner Channels

Keltner Channels, created by Chester Keltner, are also used to gauge price volatility. They consist of an exponential moving average (usually 20 periods) and two bands, one above and one below the moving average, calculated based on the Average True Range (ATR). Like the Bollinger Bands, widening channels indicate increased volatility and narrowing channels indicate decreased volatility.

The Squeeze Indicator

The BB/KC Squeeze Indicator combines the concepts of Bollinger Bands and Keltner Channels to identify periods of low volatility or “squeeze” conditions. A squeeze is identified when the Bollinger Bands are within the Keltner Channels, indicating that the price may soon break out of its current range.

Benefits of the BB/KC Squeeze

The BB/KC Squeeze offers several advantages to traders:

  • It helps identify periods of low volatility, which often precede significant price movements.
  • Combining two volatility indicators provides a more robust signal for potential breakouts.
  • It can be applied to various time frames and asset classes, making it a versatile tool for traders.

Example scanners and strategies that use BB/KC Squeeze

The BB/KC Squeeze can be used in both Scanning the market and Testing Strategies. To see how exactly it can be used in these ways, we provide the following samples. The scanner searches the market for stocks using this indicator, and the strategy tests buying and selling rules built around this indicator.

"BB/KC Squeeze Bullish Breakout" scanner by ILuvMarkets
charts.trendspider.com
“BB/KC Squeeze Bullish Breakout” scanner by ILuvMarkets
"BB/KC Squeeze Bullish Breakout" strategy by ILuvMarkets
charts.trendspider.com
“BB/KC Squeeze Bullish Breakout” strategy by ILuvMarkets

Identifying a BB/KC Squeeze Setup

Conditions for a Squeeze

To identify a BB/KC Squeeze setup, look for the following conditions:

  • The Bollinger Bands are within the Keltner Channels, indicating a squeeze.
  • The price is consolidating within a tight range, suggesting decreased volatility.
    B. Confirming a Squeeze

To confirm a squeeze, traders can use additional tools such as:

  • Momentum indicators like the Relative Strength Index (RSI) or the Moving Average Convergence Divergence (MACD) to assess the strength of the underlying trend.
  • Volume analysis to confirm the strength of the potential breakout.

Trading the BB/KC Squeeze

Entry Points

Once a squeeze has been identified and confirmed, traders can consider the following entry points:

  • A breakout above the upper Bollinger Band indicates a potential bullish breakout.
  • A breakdown below the lower Bollinger Band suggests a possible bearish breakout.

Stop Loss and Profit Targets

Setting appropriate stop loss and profit targets is essential for successful trading. Consider the following guidelines:

  • Place stop-loss orders just below the lower Bollinger Band for long positions or above the upper Bollinger Band for short positions.
  • Set profit targets based on historical price movements or technical analysis patterns, such as support and resistance levels or Fibonacci retracements.

Limitations and Considerations

While the BB/KC Squeeze Indicator can provide valuable insights, it is essential to be aware of its limitations:

  • False breakouts may occur, leading to potential losses. Use additional confirmation tools and a proper risk management strategy to mitigate this risk.
  • The BB/KC Squeeze Indicator may not perform well in strongly trending markets, as it primarily focuses on range-bound conditions.
  • The indicator’s effectiveness may vary across different asset classes and time frames. Traders should test and optimize the indicator for their specific trading style and market conditions.

The Bottom Line

The BB/KC Squeeze Indicator is a powerful tool for traders looking to capitalize on breakout opportunities from tight trading ranges. By combining the volatility and momentum components of Bollinger Bands and Keltner Channels, this indicator can help traders identify periods of low volatility and potential breakouts. However, it is essential to be aware of the indicator’s limitations and use additional confirmation tools and proper risk management techniques to maximize its effectiveness.

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RSI with Bollinger Bands Chaikin Oscillator: A Comprehensive Guide