Bollinger Bands

Bollinger Bands are a volatility indicator developed by John Bollinger in the 1980s. They consist of three lines: a simple moving average (middle band) and two standard deviation bands above and below.

Components:

• Middle Band: 20-period Simple Moving Average (SMA)
• Upper Band: SMA + (2 × Standard Deviation)
• Lower Band: SMA - (2 × Standard Deviation)

How to Interpret:

Band Width (Volatility):

• Wide bands: High volatility
• Narrow bands: Low volatility (squeeze)
• Squeeze: Often precedes significant price move

Price Relative to Bands:

• Price touching upper band → Relatively high (not necessarily sell)
• Price touching lower band → Relatively low (not necessarily buy)
• Price outside bands → Extreme move, often unsustainable

Trading Strategies:

1. Bollinger Bounce:

• Price tends to return to middle band
• Buy at lower band, sell at upper (in ranging markets)

2. Bollinger Squeeze:

• Narrow bands → breakout imminent
• Trade the breakout direction with volume confirmation

3. Walking the Bands:

• In strong trends, price can "walk" along upper/lower band
• Don't fade strong trends just because bands are touched

Limitations:

• Not a standalone system
• Works differently in trending vs. ranging markets
• Standard settings may not suit all securities