TTM Squeeze Backtester

What is the TTM Squeeze?

The TTM Squeeze is a momentum and volatility indicator designed to identify periods when a market is consolidating and preparing for a significant move. John Carter developed this indicator to capture explosive price movements that follow low-volatility periods. The indicator uses Bollinger Bands and Keltner Channels to determine market compression. When the Bollinger Bands move inside the Keltner Channels, it signifies a squeeze, indicating low volatility. When the Bollinger Bands move outside the Keltner Channels, it indicates that the squeeze has released, often leading to a strong price movement.

Why Backtest the TTM Squeeze?

Backtesting allows traders to simulate trades using historical data to evaluate the effectiveness of a strategy. By manually backtesting the TTM Squeeze, traders can identify the best settings for specific stocks, ensuring they maximize their chances of capitalizing on explosive price movements. This process helps refine the strategy, reduce risks, and improve overall trading performance.

Getting Started

Step 1: Switching to the Strategies Tab

1. Open ThinkOrSwim and navigate to the Studies icon in the top right.
2. Switch to the Strategies tab instead of the default Studies tab.
3. Click Create to start building your strategy.

Switching to the Strategies tab is crucial as it allows us to test the strategy and analyze the results, providing a profit and loss report that helps in comparing different settings.

Step 2: Defining Variables

Start by defining the variables for the settings you want to test. These variables will allow you to tweak the TTM Squeeze settings to find the most effective configuration.

input length = 20;
input nk = 1.5;
input nb = 2.0;

def squeeze = TTM_Squeeze(close, length, nk, nb, 1.0).squeezeAlert;
    

Step 3: Creating a Trend Indicator

To determine the overall market direction, we’ll use exponential moving averages (EMAs). This helps in understanding whether the market trend is bullish or bearish, which is critical for making informed trading decisions.

def EMA13 = ExpAverage(close, 13);
def EMA21 = ExpAverage(close, 21);
def EMA34 = ExpAverage(close, 34);

def bullish = EMA13 > EMA21 and EMA21 > EMA34;
def bearish = EMA13 < EMA21 and EMA21 < EMA34;
    

Step 4: Setting Up Trade Conditions

We need to wait for at least five red squeeze dots before entering a trade. This ensures that the market has been in a low-volatility state for a sufficient period before we expect a significant move.

def squeezeAlert = Sum(squeeze, 5) == 0;

def bullishSignal = if squeezeAlert and bullish then 1 else 0;
def bearishSignal = if squeezeAlert and bearish then 1 else 0;
    

Step 5: Defining Exit Conditions

Set exit conditions based on EMA crosses. This helps in determining the best time to exit a trade, ensuring that we capture maximum profit or minimize losses.

def exitBullish = EMA13 crosses below EMA21;
def exitBearish = EMA13 crosses above EMA21;
    

Step 6: Adding Orders

Use AddOrder to implement buy and sell conditions. This is where we define the actual trading logic, telling ThinkOrSwim when to enter and exit trades.

AddOrder(OrderType.BUY_TO_OPEN, bullishSignal, close, 100);
AddOrder(OrderType.SELL_TO_CLOSE, exitBullish, close, 100);

AddOrder(OrderType.SELL_TO_OPEN, bearishSignal, close, 100);
AddOrder(OrderType.BUY_TO_CLOSE, exitBearish, close, 100);
    

Running the Strategy

After defining the strategy, click OK and review the trades on your chart. Use the Global Strategy Settings to display the floating P&L for a quick overview of performance. This helps in quickly assessing whether the strategy is profitable or needs adjustments.

Practical Examples

Example 1: Testing on Goldman Sachs

• Using default settings:
• EMA13 > EMA21 > EMA34 for bullish signals
• EMA13 < EMA21 < EMA34 for bearish signals
• Resulted in an overall negative P&L

This example shows that not all stocks will perform well with the default settings, highlighting the importance of backtesting and tweaking the parameters.

Example 2: Testing on Apple

• Tweaking settings to:
• length = 20
• nk = 1.5
• nb = 2.0
• Resulted in a positive P&L

By adjusting the settings, we found a configuration that works well for Apple, resulting in profitable trades. This demonstrates the value of customizing the TTM Squeeze settings for different stocks.

Advanced Customizations

Adding Profit Targets

In addition to exit conditions based on EMA crosses, you can set profit targets to exit trades once a certain profit level is achieved.

AddOrder(OrderType.SELL_TO_CLOSE, high >= EntryPrice() * 1.03, close, 100);
AddOrder(OrderType.BUY_TO_CLOSE, low <= EntryPrice() * 0.97, close, 100);
    

Including Stop-Loss Orders

Incorporate stop-loss orders to limit potential losses, ensuring that your trading strategy remains robust under different market conditions.

AddOrder(OrderType.SELL_TO_CLOSE, low <= EntryPrice() * 0.97, close, 100); AddOrder(OrderType.BUY_TO_CLOSE, high >= EntryPrice() * 1.03, close, 100);
    

Optimizing the Strategy

To optimize the strategy, continuously test and tweak the settings. Analyze the results and adjust the parameters based on the performance of different stocks and timeframes.

Example: Testing Different Timeframes

Testing on a 30-minute chart:

• Adjust length, nk, and nb to see how the strategy performs on shorter timeframes.
• Evaluate the P&L report to determine profitability.

Testing on a daily chart:

• Adjust the parameters to match the characteristics of the daily timeframe.
• Compare results with other timeframes to find the most profitable settings.

Conclusion

By following this comprehensive guide, you can build a manual backtester for the TTM Squeeze in ThinkOrSwim. Experiment with different settings and timeframes to find what works best for your preferred tickers. Download the strategy code for free from the link below and start optimizing your trading strategies today.

Thank you for watching this episode. If you have any indicators you’d like to see, feel free to comment below or contact us through our website. Happy trading!

Additional Resources

For more information on the TTM Squeeze and other trading strategies, check out our other tutorials and resources available on our website. Join our community of traders and stay updated with the latest trading techniques and tools.