Squeeze Momentum on Reversal Strategy

The Squeeze Momentum on Reversal Strategy indicator is a volatility-based trading tool designed to identify potential trend reversals by analyzing the relationship between Bollinger Bands and Keltner Channels. It aims to capture momentum shifts that occur after periods of market consolidation (squeezes) to provide systematic entry signals.

Usage

The strategy is primarily used to identify entries when momentum begins to shift after reaching extreme levels. It is optimized for the EUR/USD 1H timeframe with default parameters but can be adapted to other assets.

The script visualizes market conditions using two main components:

• Histogram: Displays the linear regression of price relative to its average. Bright green or red bars indicate increasing momentum, while darker shades indicate decelerating momentum.
• Midline Crosses: Indicate the "squeeze" state. A change in the midline color signals whether the market is currently in a squeeze (Bollinger Bands inside Keltner Channels) or if the squeeze has been released.

A Long Signal is triggered when the histogram is below the negative "Reversal Strength" threshold and begins to tick upward (momentum slowing down on the short side). A Short Signal is triggered when the histogram is above the positive "Reversal Strength" threshold and begins to tick downward (momentum slowing down on the long side).

Details

The script is based on the original work of LazyBear's Squeeze Momentum indicator. It calculates the "Squeeze" by comparing Bollinger Bands (standard deviation-based) to Keltner Channels (ATR-based). When the Bollinger Bands are squeezed inside the Keltner Channels, it signifies a low-volatility period often followed by a violent breakout.

This specific version implements a reversal logic: instead of trading the breakout of the squeeze, it looks for points where the momentum oscillator (derived from linear regression) reaches a specific "Reversal Strength" and begins to revert. This approach attempts to catch the exhaustion points of strong moves.

Settings

Core Parameters

• BB Length: Sets the lookback period for the Bollinger Bands calculation.
• BB MultFactor: The standard deviation multiplier for the width of the Bollinger Bands.
• KC Length: Sets the lookback period for the Keltner Channels.
• KC MultFactor: The multiplier applied to the range (SMA or True Range) for Keltner Channel width.
• Reversal Strength: The threshold used to determine if momentum has reached an "extreme" level before a reversal signal can be generated.
• Use TrueRange (KC): A toggle to switch between using the True Range or a simple High-Low range for Keltner Channel calculations.

FAQ

How do I access Squeeze Momentum on Reversal Strategy?

You can get access on the LuxAlgo Library for charting platforms like TradingView, MetaTrader (MT4/MT5), and NinjaTrader for free.

What does it mean when the midline crosses turn gray?

When the dots on the zero line turn gray, it indicates that the Bollinger Bands have expanded outside the Keltner Channels, meaning the "squeeze" has been released and volatility is increasing.

Which timeframe works best for this strategy?

While the default parameters are tested for the EUR/USD 1H chart, the strategy can be used on various timeframes. Users should adjust the "Reversal Strength" setting when switching timeframes to account for different volatility levels.