At some point, almost every trader has been sold the idea that some trading setup is a guaranteed way to make money. One of the most popular themes is the Bollinger Band Squeeze, which many tout as a surefire way to make money by identifying those low-volatility periods that likely precede big moves in price.
Following the Bollinger Band Squeeze along traditional lines doesn’t seem to work—and can even be counterproductive. It is because it has remained one of the well-known strategies and, as such, has been widely followed. This inevitably attracts a high volume of retail traders, causing overcrowded trades.
It is on this Bollinger Band Squeeze that discussion is found—a method that employs Bollinger Bands to identify when price action becomes very low in volatility and perhaps a breakout is around the corner. Most traders expect great returns when they follow the band breakout, but the reality of doing what everyone else does may leave them in losses.
How To Trade Against the Bollinger Band Squeeze?
The solution? Trade against the Bollinger Band Squeeze. This counterintuitive approach is all about going the opposite way of a squeeze, thus exploiting the common patterns that most traders miss. Below, we will go through how this works.
Some basic considerations for the Bollinger Band Squeeze, some psychological insights to go with the reverse strategy, and good practices to implement when it comes to timing your trades.
Understanding the Basics of a Bollinger Band Squeeze
Implementing this strategy begins with understanding what the Bollinger Band Squeeze is. Bollinger Bands consist of an upper and lower band that are measures of volatility around a moving average. When these bands contract or “squeeze,” we know that we are in a period of low volatility, which one typically recognizes as the market is getting ready for a big move.
As a traditional approach may advise, once the bands tighten and then burst out, the price ought to break sharply; frequently, it is directed in the way of the initial squeeze breakout.
However, the problem of such a strategy is that not all squeezes predict the breaks. In fact, what seems like a breakout gives out often as a false signal, and traders end up being losers since they have committed to what seemed like a promising trend. Instead, we seek to trade against the Bollinger Band Squeeze.
Why Trade Against the Bollinger Band Squeeze?
High Participation Means High Risk
The Traditional Bollinger Band Squeeze setup is indeed extremely popular, and therefore more people enter this trade at similar entry and exit points, often turning it into a market trap. Big players take advantage of the crowd by reversing the price immediately after its breakout.
The “Crowded Trade” Effect
Everyone jumps onto the same side of the trade, and voilà, you have a crowded scenario. Even a small reversal can trigger a cascade of stop-losses, thrusting the price in the opposite direction of the initial squeeze breakout. Trading against the squeeze puts you on the wrong side of the crowd.
Natural Market Movements
Many markets just oscillate to and fro instead of trending. You can take advantage of these oscillations by trading against the crowd’s overreaction to the Bollinger Band Squeeze and catch what other people are missing: the reversals.
How to Identify and Trade Against Bollinger Band Squeezes
Step 1: Identify the Squeeze
Look for the places where the distance between the upper and lower bands is minimal. That’s the lowest point of volatility, and that’s when most traders feel a breakout might be arriving. Instead of waiting for the breakout, prepare to anticipate the likely reversal.
Step 2: Identify Reversal Patterns
Rather than jumping into trades at the first hint of Bollinger Bands expansion, wait to see if prices start to reverse. Key signals include the following:
- Price Action Patterns: Candle patterns such as dojis or engulfing candles signal a possible reversal after a squeeze breakout.
- EMA Indicator: Replace the middle Bollinger Band with a 15-period EMA. This EMA could add more depth to the situation and give you a sense of whether this is forming near a critical resistance or support level.
Step 3: Use a Cycle Indicator for the Timing
Another embellishment to this plan of attack is an indicator of a cycle. A cycle indicator shows periodic highs and lows, helping you pick the right points of entry. For example, if a squeeze marks a cycle high, then the situation may present a good opportunity for considering a countertrend entry.
Trading Against the Squeeze Entry Techniques
Technique #1: The 15 EMA for Early Entry
Replacing the middle line of the Bollinger Band with a 15-period EMA will help you anticipate reversal points. You can enter earlier than waiting for the traditional middle line crossover because the 15 EMA is closer to the upper or lower bands. For instance, once the price breaks above the bands, you can enter a short position when it approaches or crosses below the 15 EMA.
Technique #2: Using the Cycle High and Cycle Low Indicators
Cycle indicators provide strong timing for entries. When the squeeze starts, the price can breakout one way and then immediately reverse due to the formation of a cycle high/low, allowing you to enter the trade in the stronger opposing direction, anticipating a reversal. For instance, upon a potential bullish breakout shown by the Bollinger Bands but a cycle high just formed, it is time to enter short.
Example of Trading Against the Squeeze
Suppose you observe a Bollinger Band Squeeze on an underlying stock that, from a historical perspective, gives a bullish breakout. The tightening up of the upper and lower bands and also the flat trading of the price has cooled off—the heat is low volatility. Most traders will align themselves long in anticipation of the pending breakout, but you don’t:
- Wait for the breakout to set in the direction of the crowd.
- Use the 15 EMA or cycle high on the cycle indicator to confirm your entry point.
- As price crosses above the upper band, you go short, expecting that the uptrend will dissipate shortly.
Conclusion
While old-fashioned Bollinger Band Squeezes are more often used for breakout idea identification, trading against the squeeze provides a different and very effective way. You go opposite to the crowd, setting yourself up to enjoy market reversions more often related to traders’ traps. Then, by applying tools like the 15 EMA and cycle indicators, you can refine your timing and entry accuracy, allowing you to make more precise entries.
The next time you see a Bollinger Band Squeeze, consider this strategy and trade against the crowd by taking advantage of this reversal potential. By thinking differently than the masses, you’ll be on the same wavelength as the natural market movements, opening the door to far more lucrative opportunities.
