Candlesticks are one of the most popular methods to help you navigate the trading world. There are multiple different theories that you can use to know when you should invest in particular stocks, and when you need to sell the trade. Although it may seem intimidating, the Bullish/Bearish Squeeze Alert Pattern is a great tool to help you feel comfortable when trading candlesticks.
Squeeze alert patterns can occur in both the bullish and bearish markets and are indicated by a distinctive triangle pattern. While they occur in different markets, the main principle behind them is very similar and can be a great tool to enter or exit on a specific security.
Although these are rare candlestick patterns, squeeze alerts do occur in both the bullish and bearish markets. To be a successful candlestick trader, it is essential that you know how to identify one, what they mean, and how you should act upon them.
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Table of Contents
Types of Squeeze Alert Candlestick Patterns
When it comes to further understanding this pattern, it is essential to be familiar with the two distinct patterns that you may experience. The first of these patterns being the bullish pattern, and the second being the bearish pattern.
Bullish Squeeze Alert Pattern
It is quite simple to identify this pattern.
The first day needs to occur when the stock market is down.
The following two days need to fall inside of each other, which means that day two should be equal or less than day one, and you can follow that pattern through the changes in the market.
You are ultimately looking for a triangle that initiates with the formation of a black or bearish candlesticks.
Bearish Squeeze Alert Pattern
Similar to the Bullish Squeeze Alert Pattern, the Bearish pattern also features a triangle as the vital sign to recognize it.
With this pattern, you are looking for the first candlestick to be white or bullish, and have the following two days fall inside of each other and can be any color.
A bearish squeeze alert means that the upward trend of the stock has stopped.
How to Identify Squeeze Alert Patterns in Candlestick Trading?
The first step to utilize squeeze alerts is to understand what you are looking for.
Let’s break down these patterns to help you better understand what to look for and the different characteristics that these patterns possess.
Construction of Squeeze Alert Pattern
As previously mentioned, a squeeze alert pattern is easy to identify in both the bullish and bearish markets. What you are looking for is three candlesticks in a row that form a triangle.
After the first day, the second and third day should fit inside of each other. Depending on which market you are in, the colors may be different.
Key Characteristics of Squeeze Alert Pattern
- Day One Candle: The most crucial aspect of your first candlestick is that it needs to occur on a down or bearish day for a bullish squeeze alert pattern, and on a up or bullish day for a bearish squeeze alert pattern.
- Color of the Candles: On most charting platforms, the color of the first candle for the bullish market is likely to be black or red, and the color of a bearish market candle is ideally be white or green. In the case of a bullish squeeze alert pattern, while not necessary, the strongest squeeze alert formation will typically include all black or red candlesticks in the pattern. The opposite is true for a bearish squeeze alert pattern.
- Shape of the Candles: The shape of your candles should form a triangle. The second candlestick should fit within the first, and the third candlestick should fit within the second candlestick.
How to Interpret Squeeze Alert Patterns?
How you should interpret the pattern depends on which market you are looking at.
A bullish market means that the security you are looking at has stopped it’s downtrend. If you are looking at a bearish market squeeze alert pattern, then the upward trend that the security has been on is coming to a stop.
How to Improve the Reliability of Squeeze Alert Patterns in Candlestick Trading?
The reliability of a squeeze alert pattern can be sizably improved by using it in combination with other complementary tools in technical analysis.
Described below are the two technical indicators that work best with squeeze alert patterns –
- Relative Strength Index: RSI is a popular indicator to use when focusing on candlestick patterns.
They are excellent indicators of entry points for your stock trades, but they can also give you a different view of the market as a whole.
If you notice a market falling or increasing out of the specified index, it can be a sign for you to prepare to buy more or to sell off your stock.
- Bollinger Bands: Bollinger Bands are an excellent tool for trading as they are created to identify support or resistance areas within a trade.
If a candlestick touches the upper band, then it may be approaching a bearish reversal. The bullish reversal is possible if the candlestick begins to come to a lower band.
How to Trade Squeeze Alert Patterns in Candlestick Trading?
Once you see a squeeze alert pattern in its triangle form, you should be ready to either buy or sell.
The representation of this triangular pattern means that the security is going to move in one direction or another.
One of the most valuable strategies to use is to focus on the volume of the market to identify strength and where the market is. When trading the squeeze alert candlestick pattern in combination with the trading volume signals of the security, you can leverage the below described considerations to inform your trading decisions
Market Environment
Trading based on volume is a great way to strengthen your decisions and to let you know if a reversal is potentially going to occur. With a squeeze alert, the volume should be descending within the range of the previous candlestick.
Identify and Confirm Trade Opportunity
Squeeze alert patterns are often an indication that the current trend a security is experiencing has stopped or stalled. Once again, it is always important to be aware of how a security is performing in general when trading this pattern.
Determine Trade Entry, Stop Loss, and Take Profit Levels
Described below is how you would determine your trade entry, stop loss and take profit target when trading the squeeze alert pattern –
- Trade Entry: Once you have identified a squeeze alert pattern starting with a bearish candle, you would want to enter the trade at the low of the third candlestick. You can then wait to see what the trade will do over the next few days.
- Stop Loss: Your stop loss should be set at the low for the bearish candlestick on the first day. It can also be equal to the price of when you entered the trade.
- Take Profit: The take profit level should be above the price you entered the trade, and it should be above the low for the squeeze alert pattern. Tools such as Fibonacci Extension levels work really well in combination with this pattern to locate ideal take profit levels.
Execute and Manage Trade
Squeeze alert patterns are a rare occurrence.
Once the pattern has been identified, just know that the trend is going to move in one direction or another. It is recommended that you observe the patterns that are existing in the security to help you make your decisions.
Advantages and Limitations of Trading Squeeze Alert Patterns
Now that we have covered the fundamentals around trading the squeeze alert pattern, let us briefly talk about a few advantages and limitations of trading this pattern.
Advantages of Trading Squeeze Alert Pattern
Described below are few of the most important advantages of trading the squeeze alert pattern –
- On relative terms, it is extremely easy to identify and trade a squeeze alert pattern.
- Accuracy wise, squeeze alert is known to be one of the more reliable candlestick patterns.
Limitations of Trading Squeeze Alert Pattern
Described below are few of the most important advantages of trading the squeeze alert pattern –
- Post the completion of a squeeze alert pattern, the price trend can still move in either direction.
- Squeeze alert pattern has a very strict requirement and is extremely rare to be found on the price chart of a financial instrument.
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Conclusion
Candlestick patterns are a popular trading tool that is not only easy to understand for beginners but are also flexible and reliable in helping one make informed trading decisions. With the squeeze alert pattern, not only is it one of the easiest patterns to identify, but the rarity of the occurrence makes it stand out in both the bullish and bearish markets.
Candlestick patterns can be identified by three descending candlesticks that fit within the parameters of the previous days. These are great indicators that the particular security is going to have a major shift. These patterns can be either in black or white, depending on the trend of the market, as well as if it is occurring in a bullish or bearish market.
To make a squeeze alert pattern more reliable, you can use a relative strength index or Bollinger bands, which can help you find the strength of trends and how the market appears as a whole. Although the squeeze alert pattern is rare, it does occur enough times to make looking for them worthwhile. Furthermore, when you do see this pattern on the price chart of a security, it can help you understand what may happen going forward.
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