A scenario where price range becomes very narrow, and volatility becomes extremely quiet, often seen as the “calm before the storm”.

A squeeze usually refers to a technical setup that is based on the assumption that volatility is cyclical and that periods of extremely quiet are followed by periods of violent moves. It is usually the case that the market is consolidating when the volatility drops and trending when the volatility picks up. In extreme cases, the volatility drops to such a low level that there is a “squeeze” in price action. A breakout from this squeeze is both a decision on a direction, and a possible kick off to an increase in volatility qualities that are attractive if you are in the right side of the market. The squeeze is therefore sometimes seen as  the “calm before the storm”.

The squeeze is typically identified by the Bollinger Bands and Bollinger Bandwidth. Below are examples of the squeeze seen in the USD/JPY and GBP/CHF.

USD/JPY Squeeze 1

GBP/CHF 1H Chart Squeeze 4/15/2011

Read about a case study of the Squeeze here: