Compression, and what tight ranges tend to precede
Volatility clusters, so quiet periods make larger moves more likely. That says nothing whatsoever about direction, and the gap between those two statements is where people get hurt.
Compression is a stretch of bars whose range is unusually narrow relative to the instrument's own recent history. It is the mirror of extension and is measured the same way — against a denominator, not in raw points.
Ways it gets measured
- ATR at a low — current ATR at or near its lowest reading of the last
nperiods - Narrow range counts — NR7, a bar with the narrowest range of the last seven, from Toby Crabel's work on short-term price patterns
- Band width — the distance between volatility bands at a multi-period low, sometimes called a squeeze
- Inside bars — a bar whose entire range sits within the previous bar's, and runs of them
These measure the same underlying thing through different arithmetic and they largely agree, which is worth remembering before putting three of them on one chart.
Why compression is informative at all
Volatility persists. Quiet periods tend to be followed by quiet periods and violent ones by violent ones, at a rate well beyond chance. This clustering is one of the most reliably documented features of financial price series, and it is the reason a compressed reading carries any information about what comes next.
But note precisely what it supports: a raised likelihood of larger movement. That is a statement about magnitude.
Compression is directionless, and this is the whole point. A narrow range says a bigger move has become more likely. It contains nothing about which way. Any tool, article, or sales page that treats a squeeze as a directional condition has added an assumption the measurement does not contain, and has not told you it did so.
Three ways compression resolves
Expansion. Range widens and price moves decisively. This is the case everyone plans for.
Continued quiet. The compression simply persists, sometimes for a long time. Quiet does not have a maximum duration, and waiting for a break can mean waiting through many sessions.
Expansion, then reversal. Range widens, price moves, and then comes back through the compression zone the other way. This resolves the compression while punishing anyone who treated the first move as the answer.
The practical failure
The common mistake is not misreading compression — it is sizing as though direction were known because the timing felt known. Being right that a bigger move is coming and wrong about which way is a complete loss, and the confidence that comes from the first half of that tends to increase the cost of the second.
Whatever you conclude about direction has to come from something other than the compression itself.