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Old 02-24-2009, 05:40 AM   #1 (permalink)
 
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A Better Squeeze Indicator


Did you have read John Carter's Mastering the Trade book, which is one of the recommended books at informedtrades.com, and implemented the Squeeze indicator that he talks about and found out that it does not seem to work at all?. And you wondered if the author is really using this indicator just like he stated?.

If you simply plot the momentum as histogram you will get stopped on the first lower/higher bar. Typical 12 period momentum histogram is quite choppy. The histogram from Carter's webpage seems much smoother I wonder why he did not address that issue in his book!.

Instead of plotting momentum I plotted the difference of two moving averages (7 and 20) and it seems to work ok. But I figured the best way to smooth the histogram is to calculate the linear regression curve of the price and then plot the momentum of that curve as histogram. With this approach the histogram moves closer to the price than the moving averages and it is much smoother. I somehow think this is the actual indicator they use.

Anyone has a better way to optimize the indicator?, I am all ears.

Cheers.
Powell.

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Old 02-24-2009, 01:44 PM   #2 (permalink)
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Hey Powell,

Glad to hear from you.

I don't remember this specifically but what I particularly liked about this book were not so much the exact strategies that he talks about, but how he outlines through the strategies presented how he looks at different market situations. I would also imagine that the strategies change over time so it would not surprise me if he was using it that way then and has updated it based on recent market conditions.

Anyways just my two cents I will have a look at that specific part later on today and let you know if I can think of anything that may improve on it.

Best Regards,
Dave
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Old 02-24-2009, 10:02 PM   #3 (permalink)
 
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Squeeze Indicator code.


Code of the indicator and images showing the difference. The code is in EasyLanguage compatible with TradeStation. You can easily port it to ProRealTime code.

Code:
{----------------
  Use Bollinger bands and Ketler Channels to detect squeeze. Code is in TradeStation EasyLanguage.
-----------------}

{ ** Free code, no warranty or support guaranteed. ** }
 
inputs:
	Price(Close),
	BollingerPrice(Close),
	Length(20),
	NumDevsUp(2),
	NumDevsDn(-2),
	NumATRs(1.5),
	SQBreakoutColor(Blue),
	SQColor(Yellow),
	MLength(12),
	ColorNormLength( 14 ), 
	UpColor( Green ), 
	DnColor( Red ), 
	GridForegroundColor( Black ),
	Displace(0);

variables:
	ApplicationType( 0 ),
	Avg(0),
	Shift(0),
	SDev(0),
	KLowerBand(0), KUpperBand(0),
	BLowerBand(0), BUpperBand(0),
	Mom( 0 ),
	Accel( 0 ),
	LinReg( 0 ),
	ColorLevel( 0 );

{ Bollinger Band Calculations }
Avg = AverageFC( BollingerPrice, Length ) ;
SDev = StandardDev( BollingerPrice, Length, 1 ) ;
BUpperBand = Avg + NumDevsUp * SDev ;
BLowerBand = Avg + NumDevsDn * SDev ;
{ Ketler Channel Calculations }

Avg = AverageFC( Price, Length ) ;
Shift = NumATRs * AvgTrueRange( Length ) ;
KUpperBand = Avg + Shift ;
KLowerBand = Avg - Shift ;

{ Now show me the Squeeze }  
Plot1[Displace](0, "Signal");

{ If Bollinger bands are insize the ketler channel then alert, get ready for squeeze }
if (BUpperBand <= KUpperBand and BLowerBand >= KLowerBand) then 
begin
	SetPlotColor(1, SQColor);
end;

{ If you see this after the alert above then play the squeeze depending on the direction of momentum }
if (BUpperBand > KUpperBand and BlowerBand < KLowerBand) then 
begin
	SetPlotColor(1, SQBreakoutColor);
end;

{ Plot Momentum }
if CurrentBar = 1 then
	ApplicationType = GetAppInfo( aiApplicationType ) ;

LinReg = LinearRegValue(Price, Mlength, 0); // Smooth out the price, you can use close/high/low/average
Mom = Momentum(LinReg, MLength); // Now get the momentum of the above value.
Accel = Momentum(Mom, 1) ; { 1 bar acceleration }
Plot2(Mom, "Momentum") ;

{ Gradient coloring }
if CurrentBar > 1 and UpColor >= 0 and DnColor >= 0 then
	begin
	ColorLevel = NormGradientColor( Mom, true, ColorNormLength, UpColor, DnColor ) ;
	if ApplicationType = 1 then { study is applied to a chart }
		SetPlotColor(2, ColorLevel )
	else if ApplicationType > 1 then { study is applied to grid app }
	begin
		SetPlotColor(2, GridForegroundColor) ;
		SetPlotBGColor(2, ColorLevel) ;
	end;
end;
Image of ES 5min chart with 12 Period Linear Regression, Gray channel is Bollinger Bands and Yellow lines are Ketler Channels.



Image of same chart as above with 12 Period Momentum, look at the histogram, its quite choppy.


cheers.
Powell.
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Old 02-25-2009, 01:18 PM   #4 (permalink)
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Hey Powell,

Thanks for sharing that's pretty awesome.

Best Regards,
Dave
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Old 02-26-2009, 10:58 PM   #5 (permalink)
 
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backtesting the squeeze


Heads up to everyone, backtest results show that squeeze play is almost like scalping. R value is &lt; 1!!. You need lot of capital and a tight stop to make moderate profit on each trade and one will get stopped on almost 50% of the trades. Drawdown was around 8% and net profit was around 20% after trading a 60min chart for 1 year.

I will probably publish detailed backtesting results on strategy for this indicator in a little while.

Cheers.
Powell.
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Old 05-18-2010, 06:23 AM   #6 (permalink)
 
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BB


Geek101
I was looking at linking BB to my momentum based system. Have you 'rules' regarding entries using BB?
Particularly using 5m chart and trading 1m TF to scalp for bigger scalps.
Thanks
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Old 05-18-2010, 08:23 AM   #7 (permalink)
 
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Squeeze indicator as seen by smart money :
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