Squeeze Alert Candlestick Pattern and its Types

Hi there, everyone. Forex market offers us various opportunities with its dynamic nature and constantly changing prices. However, it is important to make the right decisions at the right time to be successful in this market. This is where technical analysis, particularly interpreting patterns in Japanese candlesticks, can help unlock real opportunities. Let's explore how the "Squeeze Alert" candlestick pattern works in Forex trading, from spotting the setup to setting targets and managing risk.

What is a Squeeze Alert Candlestick Pattern?

The Squeeze Alert is a short, three-bar candlestick formation that signals a tightening of price action, which is a brief consolidation that often precedes a sharper move. Visually it looks like a narrowing cluster of candles. The first is relatively large. The second is noticeably smaller and contained within the first's range. The third is the smallest. It is usually nestled inside the second. That visual "squeeze" on the chart suggests headway is pausing and traders are compressing their positions, which increases the likelihood of a directional breakout once new conviction arrives.

This pattern is not a standalone buy or sell trigger by itself. Instead, it serves as a context clue. This tool helps traders pinpoint times when the balance between buyers and sellers is fragile. The resulting compact price structure can resolve into either a trend continuation or a reversal. The ultimate direction is determined by analyzing broader technical factors, including volume, support/resistance, and trend context.  Because the three bars are compact and progressive in size, the Squeeze Alert helps highlight that volatility has contracted and a stronger directional move may be imminent.

What is a Bullish Squeeze Alert?

A Bullish Squeeze Alert appears amid a downtrend (or during corrective weakness) and suggests the market is coiling before an upside breakout. The clustering of the three candles shows sellers are losing steam. After an initial larger bar that follows the prevailing weakness, the subsequent smaller bars indicate diminishing selling pressure and indecision.

Bullish Squeeze Alert Pattern

When price then breaks above nearby resistance or the high of the pattern with convincing follow-through, traders interpret that as a transition from compression into bullish thrust. This breakout is ideally accompanied by rising volume or other supporting indicators, prompting traders to look for long entries or trend-following setups.

What is a Bearish Squeeze Alert?

A Bearish Squeeze Alert forms while prices are generally rising and signals that upward drive may be exhausted and ready to unwind. The pattern's shrinking candles reflect buyers becoming tentative. A sizable first candle keeps the uptrend in place. Then, a smaller second candle and an even tinier third candle show hesitation and a loss of conviction.

Bearish Squeeze Alert Pattern

Confirmation comes when price breaks down below the pattern's support or the low of the third candle, especially if selling volume increases. At that point, market participants often treat the setup as an anticipated shorting opportunity or a cue to tighten stops on long positions.

Squeeze Alert: Structure and Definition

The Squeeze Alert candlestick pattern represents a distinct period of compression or consolidation on price charts, offering clues about expectations for either an upward or downward movement in the market. This pattern typically consists of three candlesticks:

1. First candle: The first candle is a long-bodied candle that represents the continuation of the current trend. It can be either a red candle (Bullish Squeeze Alert) or a green candle (Bearish Squeeze Alert).
2. Second candle: The body of the second candle is smaller than the body of the first candle. This candle can be any color as long as it stays completely within the body of the first candle.
3. Third candle: The third candle is the smallest candle in the pattern. It often opens and closes within the body of the second candle. It can be either red or green.

The Squeeze Alert candles, regardless of their colors, form a pattern resembling a triangle on the price chart. While representing periods of consolidation on the charts, it actually hints at possible upward or downward opportunities beneath the surface. For this reason, there are two types:

• Bullish Squeeze Alert: This pattern forms during a bear market and anticipates an upward breakout.
• Bearish Squeeze Alert: This pattern forms during a bull market and foresees a downward breakout.

The Bullish Squeeze Alert pattern is a technical analysis pattern that indicates that the price is compressed and is likely to break out to the upside, like a bow being drawn. When this pattern appears, we can consider taking a position with the expectation that the price will rise.

The Bearish Squeeze Alert pattern, on the other hand, tells a completely different story. It suggests that the price is compressed in a narrow range and is likely to break out to the downside. In this case, we can consider taking a position with the expectation that the price will fall.

How to Trade Squeeze Alert Candlestick Pattern?

The Squeeze Alert pattern gives traders a chance to spot phases when the market is tightening before making its next big move. When price candles begin to shrink one after another, it's a sign that buyers and sellers are in balance, waiting for a clear direction. This quiet phase often ends with a sharp breakout, either upward or downward. Trading the Squeeze Alert starts with identifying the pattern, which consists of three candles getting progressively smaller, with each one forming inside the previous one. Once you spot it, the next step is to pay attention to the broader market direction. If the pattern forms during a downtrend, it might be preparing for an upward shift. If it appears in an uptrend, it could be warning of a downward turn.

Before taking any position, it's helpful to confirm the breakout with extra clues such as a price close outside the pattern or a noticeable change in trading volume. This helps separate real breakouts from false signals. Once confirmation comes, traders can plan their entries, stop loss levels, and targets based on the direction of the move. Below are two ways to approach this pattern depending on the market context:

How to Trade Bullish Squeeze Alert?

During a bear market, the likelihood of an upward breakout in price increases. The squeeze indicates that the price is ready to move towards higher levels. In situations where this pattern is observed, we might consider taking long (buy) positions with the expectation that the price will rise. 

After spotting this pattern, many traders wait for a candle that closes slightly above the previous range before taking action. This small break often signals that buyers are slowly regaining control. Instead of chasing the move right away, it's safer to let the market confirm its direction and then enter. A stop loss can be placed just below the pattern to manage risk. See the following example of trading on Google Inc.(ALPHABET INC.) stock:

Bullish Squeeze Alert on Google Inc. (Alphabet Inc.) stock.

• Entry: The top of the long candlestick can be considered as a breakout point. A long position can be initiated from this point.
• Stop Loss: The bottom of the long candlestick. This represents a possibility where the price may revert below the breakout point.
• Target: Set at a distance equal to the length of the long candlestick, identified as Target 1. Additionally, possible profit levels can be determined using support/resistance levels, risk/reward ratio, and other technical analysis tools.

How to Trade Bearish Squeeze Alert?

During a bull market, the probability of a downside breakout increases. The squeeze indicates that the price is ready to move to lower levels. In cases where this pattern is seen, we can often consider short (sell) positions with the expectation that the price will fall.

When this setup appears, it usually shows that the market has lost its upward strength. The price may stay quiet for a while before slipping below the pattern's support area. Waiting for a clear close beneath that level gives a cleaner entry signal. Traders often protect their positions by placing a stop loss just above the pattern's highest point to avoid false breakouts. Take a look at the following trading example on NETFLIX stock:

Bearish Squeeze Alert on NETFLIX stock

• Entry: The bottom of the long candlestick can be considered as the breakout point. A short position can be initiated from this point.
• Stop Loss: The top of the long candlestick. This represents a possibility where the price may revert above the breakout point.
• Target: Set at a distance equal to the height (length) of the candlesticks formed during the squeeze, identified as Target 1. Additionally, possible profit levels can be determined using Fibonacci retracement levels, support/resistance levels, risk/reward ratio, and other technical analysis tools.

⚠️ Important Reminder: Forex trading can offer good opportunities, but it also involves risk. Always trade only with money you can afford to lose. No candlestick pattern or indicator can predict price movements with full accuracy, including the Squeeze Alert pattern. Use it as a guide, not a guarantee. For better results, combine it with other analysis methods and sound risk management.