Bollinger Bands.
Bollinger Bands measure volatility and identify potential overbought/oversold conditions. Created by John Bollinger in the 1980s, they consist of a moving average and two standard deviation bands that expand and contract with market volatility.
What are Bollinger Bands?
Bollinger Bands are a volatility-based technical indicator created by John Bollinger in the 1980s. They consist of three lines that adjust dynamically based on market volatility:
- Upper band: Moving average + 2 standard deviations
- Middle band: 20-period simple moving average
- Lower band: Moving average – 2 standard deviations
The bands automatically expand during high volatility and contract during low volatility. This adaptive nature makes them particularly useful for identifying changing market conditions.
Bollinger Bands formula
Standard deviation measures price dispersion from the average. Higher volatility = wider bands. Lower volatility = narrower bands.
Statistically, approximately 95% of price action occurs within 2 standard deviations of the mean (assuming normal distribution). This is why prices outside the bands often signal potential reversals.
Default settings (20, 2)
Standard settings are 20-period SMA with 2 standard deviations:
- 20 = approximately one month of daily trading days
- 2 = covers ~95% of price action statistically
Common variations
| Setting | Effect | Best for |
|---|---|---|
| (20, 2) | Standard | Most timeframes |
| (10, 1.5) | Tighter, more sensitive | Day trading |
| (50, 2.5) | Smoother, fewer signals | Position trading |
John Bollinger himself recommends not changing the settings unless you have strong statistical reasons. The defaults work well across timeframes.
Reading Bollinger Bands
Price at upper band
Price touching or exceeding upper band suggests potential overbought conditions. However, in strong uptrends, price can “walk the upper band” for extended periods – touching repeatedly without significant pullback.
Price at lower band
Price touching or breaking below lower band suggests potential oversold conditions. In strong downtrends, price can “walk the lower band” similarly.
Price at middle band
The middle band (20-SMA) often acts as dynamic support in uptrends and dynamic resistance in downtrends. Watch for bounces or rejections at this level.
Bollinger Bands don’t generate standalone signals. Price touching a band doesn’t mean “buy” or “sell”. It means “price is at a statistical extreme – watch for confirmation signals from other tools”.
The Bollinger Squeeze
The “squeeze” is one of Bollinger Bands’ most useful patterns. When bands contract significantly, it signals low volatility that often precedes major price moves.
How to identify a squeeze
- Bands narrow to historically tight range
- Distance between upper and lower band reaches multi-week lows
- Price action becomes range-bound and quiet
Trading the squeeze
The squeeze itself doesn’t indicate direction – only that a big move is likely coming. Wait for breakout direction:
- Price breaks ABOVE upper band: bullish breakout
- Price breaks BELOW lower band: bearish breakout
Squeeze breakouts have high false-signal rates. Use volume confirmation or wait for retest of broken band as support/resistance before committing capital.
Walking the bands
“Walking the bands” describes price riding along one of the bands during a strong trend:
- Walking the upper band: Strong uptrend – sellers can’t push price below band
- Walking the lower band: Strong downtrend – buyers can’t push price above band
Walking the bands is a trend continuation signal, not a reversal signal. Traders who short during walking-the-upper-band often lose significantly. The bands aren’t hard ceilings or floors in trending markets.
Bollinger Bands strategies
Mean reversion (ranging markets)
In ranging markets, prices oscillate between bands. Strategy:
- Buy near lower band with bullish confirmation
- Sell near upper band with bearish confirmation
- Exit at middle band or opposite band
This works well in ranging markets but destroys accounts in trending markets. Identify market regime first.
Squeeze breakout
Identify squeeze pattern, wait for breakout, enter in breakout direction. Use volume increase as confirmation. Target = bands width at squeeze (projected).
Combining with RSI
Price at lower band + RSI below 30 + bullish divergence = high-probability reversal setup. Conversely for short setups.
Common mistakes
Mistake 1: Treating bands as automatic reversal levels
Price touching a band isn’t a signal to fade. In strong trends, price walks the bands. Always identify market regime first.
Mistake 2: Optimizing settings
John Bollinger himself discourages changing the (20, 2) defaults. Most “improvements” reduce statistical validity.
Mistake 3: Using Bollinger Bands in isolation
Bands measure volatility but don’t indicate direction. Combine with momentum indicators (RSI, MACD) and price action for higher-probability setups.
Mistake 4: Ignoring the squeeze
Many traders watch only band touches and miss the squeeze pattern. The squeeze is often more reliable than touches for generating actionable signals.
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