Volatility contraction
A sequence of shrinking ranges or volatility estimates before potential expansion.
What to look for
- ATR, true range or swing width declines by a fixed rule
- A minimum contraction duration is met
- Liquidity and session filters are set
Successive candles become smaller as the true-range line falls and price narrows between two boundaries. A larger candle then closes above the squeeze.
For a downside break, use the same contraction and duration rules, then wait for a larger candle to close below the lower boundary.When the pattern is confirmed
Expansion and close beyond the contraction boundary.
Where the idea is wrong
Return into the structure or failure to expand within a time limit.
The easy mistake
Contraction can continue and breakouts can reverse after transaction costs.
A complete volatility contraction example
Require ATR, true range or swing width to decline under a fixed rule for a minimum number of candles. Freeze the contraction boundaries and show both continuation and reversal breaks.
First rule to test
Expansion close — enter no earlier than a candle that closes outside the frozen boundary and exceeds the chosen range or ATR threshold.
Alternative rule
Breakout retest — after a valid expansion close, wait for price to revisit the broken boundary and close away from it.
Place it where the pattern is wrong
Place the example stop one fixed ATR fraction beyond the opposite contraction boundary as it stood when the breakout occurred.
Context, trigger and risk
The pattern handles timing. The other tools decide whether the location makes sense and how far normal price movement can reach.
Defines the contraction, expansion threshold and stop distance.
Provides a separate bandwidth measure for compression.
Supplies frozen breakout boundaries under a simple lookback rule.
First exit to test
Contraction width — project the frozen high-to-low width from the breakout boundary.
Alternative exit
ATR trail — trail by one fixed ATR multiple calculated only from completed candles.
Patterns need a method around them
Open a related strategy to see the wider market filter, entry, stop, exit and no-trade rule.
Bollinger squeeze
Tests whether unusually narrow bands precede a tradable volatility expansion.
- ENTRY
- Enter at the next H1 open in the direction of the first eligible release close.
- STOP
- Place stop at the opposite side of the frozen six-bar range. Risk 0.50% equity, rounded down to 0.01 lot.
- EXIT
- Take profit at 2R. Exit at market after 16 completed H1 bars if unresolved.
Donchian breakout
A rules-first breakout framework based on new lookback extremes.
- ENTRY
- Enter at the next H4 open after a completed close above the prior 20-bar upper channel for a long or below the lower channel for a short.
- STOP
- Initial stop is 2.0 × ATR(20) from the actual fill. Size to risk 0.50% of equity, rounded down to 0.01 lot; never add to or widen the position.
- EXIT
- Exit at the next H4 open after a completed close through the opposite 10-bar channel. The initial 2 ATR stop remains active until that exit.
EMA and ADX trend filter
Combines direction from an EMA with a non-directional trend-strength filter.
- ENTRY
- Enter at the next H4 open after the eligible boundary close.
- STOP
- Stop 1.5 × ATR(14) from fill. Risk 0.50% equity and round down to 0.01 lot.
- EXIT
- Take profit at 2R. Exit early at next open after a completed close crosses EMA(50) against the position.
Try it on older charts
Measure direction-neutral breakouts and include a maximum waiting period.