Bollinger Squeeze: Grain trading goes flat

The Bollinger Squeeze Indicator

In the two charts (following in this post), I have placed a blue rectangle around an indicator called the Bollinger Squeeze. This indicator was originally developed by a Tradestation subscriber, and was called NickM Next Big Move. It looks like this:

The Bollinger Squeeze indicator uses a Keltner Channel and Bollinger Bands to find a period in which market volatility is too low to take positions, and to predict which direction the next break-out will most likely occur (although I personally don't think it works that well in predicting the direction of the next momentum move). When the Keltner Channel lines contract to within the Bollinger Bands, it indicates that volatility has declined.

If there is one weakness in this indicator, it is that it tends to lag slightly, but it is still very valuable. However, I have found that in alerting a trader to both falling volatility, and notifying a trader of rising volatility, it tends to lag slightly behind the fact. This is probably unavoidable.

The Bollinger Squeeze was later commercialized by Carl Senters (if I recall correctly his name), who has developed and sold the same indicator for profit. It is available free if you have and use Tradestation. Obviously, you must be a Tradestation subscriber to download and use the indicator from the Tradestation forums.

Grains and the Bollinger Squeeze

In both of these charts -- one for corn, and the other for soybeans -- we see minimal volatility in trading today. Even though corn had a slight downtrend, it was minor and expected after a rapid rise in corn prices over the past few trading sessions. Corn has been the grain most well-supported in prices recently compared to the other grains. A period of lower volatility and a minor pull-back was expected.

Wheat was relatively subdued today, but maintained sufficient volatility for profitable trading.

In these two charts, I've bracketed the Bollinger Squeeze indicator in a blue box. When the blue dots occur at the zero line in this indicator, volatility is sufficient to take new trades. However, when the green dot occurs, followed by the red dots, volatility is low and insufficient to take a new position in the market. I have bracketed this phenomenon in both of the charts in this post. It is extremely unusual for these red dots to continue for very long, as we see in these two charts.

The good news, however, is that periods of low volatility tend to create pent-up demand that builds tension in the market, so it is predictive of high volatility to follow. The longer this period of low volatility lasts, the stronger the demand build-up is, and the more forceful will be the break-out when it occurs. That means that good trading conditions will occur again eventually, and the longer the low volatility period lasts, the stronger will be the new break-out when it happens. Volatility is what creates trading opportunities for traders.

There is a tendency to take a break and leave the computer when this condition occurs. However, that would be a mistake. It is better to remain alert and watchful, because the break-out can occur quickly and without much advance notice. When it happens, traders who have been waiting on the sidelines will jump and and place positions quickly, and prices will move very rapidly. One must be waiting at the ready for this situation to occur, because volatile trading conditions are the bread and butter of professional traders.

It is noteworthy that others commodities prices were also relatively subdued today. After reaching new all-time historic highs overnight during the European business day, gold was relatively quiet during the trading session in the United States.