Display Type: Overlay | Complexity: Beginner to Intermediate | Best For: Mean Reversion, Volatility Analysis, Support/Resistance
Bollinger Bands are one of the most popular and effective technical indicators for measuring volatility and identifying potential reversal points. Created by John Bollinger in the 1980s, these dynamic bands expand and contract based on market volatility, providing traders with valuable insights into price movements and market conditions.
What are Bollinger Bands? #
Bollinger Bands consist of three lines plotted on a price chart:
- Middle Band: A simple moving average (typically 20-period SMA)
- Upper Band: Middle band + (2 × standard deviation)
- Lower Band: Middle band – (2 × standard deviation)
The bands automatically adjust to market volatility – widening during volatile periods and narrowing during quiet periods. This dynamic nature makes them particularly useful for identifying when prices are relatively high or low compared to recent trading ranges.
Key Uses: #
- Volatility Measurement: Band width indicates market volatility levels
- Mean Reversion Signals: Price touching bands often signals potential reversals
- Trend Strength: Band direction and slope indicate trend momentum
- Breakout Identification: Band squeezes often precede significant price moves
- Dynamic Support/Resistance: Bands act as moving support and resistance levels
How Bollinger Bands Work #
Standard Formula: #
Middle Band (MB): 20-period Simple Moving Average Upper Band (UB): MB + (2 × Standard Deviation) Lower Band (LB): MB – (2 × Standard Deviation)
Standard Deviation Calculation: #
SD = √[(Σ(Price – SMA)²) / n]
Where:
- Price = Closing price for each period
- SMA = Simple Moving Average
- n = Number of periods (typically 20)
Key Characteristics: #
Statistical Foundation: Based on standard deviation, approximately 95% of price action occurs within the bands Self-Adjusting: Bands automatically widen in volatile markets and narrow in quiet periods Universal Application: Works across all timeframes and asset classes Mean Reversion Bias: Assumes prices tend to return to the middle band over time
Bollinger Band Components #
The Squeeze #
A “squeeze” occurs when bands contract significantly, indicating low volatility. This often precedes explosive price movements.
Characteristics:
- Bands move closer together
- Volume typically decreases
- Price consolidates near middle band
- Breakout usually follows within 1-5 periods
Trading Implication: Prepare for increased volatility and potential breakout
Band Walks #
When price consistently hugs one band, it indicates strong trend momentum.
Upper Band Walk:
- Price stays near or above upper band
- Strong uptrend in progress
- Don’t expect immediate reversal
Lower Band Walk:
- Price stays near or below lower band
- Strong downtrend in progress
- Avoid buying “oversold” conditions
%B Indicator #
%B shows where price is relative to the bands:
Formula: %B = (Price – Lower Band) / (Upper Band – Lower Band)
Interpretation:
- %B > 1.0: Price above upper band
- %B = 0.5: Price at middle band
- %B < 0.0: Price below lower band
Bollinger Band Settings #
Standard Settings (Most Common): #
- Period: 20
- Standard Deviation: 2.0
- MA Type: Simple Moving Average
Alternative Settings: #
| Timeframe | Periods | Std Dev | Best For |
|---|---|---|---|
| Scalping | 10 | 1.9 | Quick reversals |
| Day Trading | 20 | 2.0 | Standard settings |
| Swing Trading | 20 | 2.1 | Wider bands |
| Position Trading | 50 | 2.0 | Long-term trends |
Advanced Variations: #
Bollinger Bands with EMA:
- Replace SMA with 20 EMA for faster response
- Better for trending markets
- More prone to false signals
Multiple Standard Deviations:
- 1 SD bands: 68% of price action
- 2 SD bands: 95% of price action (standard)
- 2.5 SD bands: 99% of price action
Trading Strategies #
1. Mean Reversion Strategy #
Setup: Price touches upper or lower band Entry: Fade the move (sell at upper band, buy at lower band) Target: Middle band Stop: Beyond the opposite band
Best Conditions:
- Range-bound markets
- Normal volatility periods
- Strong support/resistance levels
2. Bollinger Bounce
#
Setup: Price bounces off bands without breaking through Entry: Enter in direction of bounce Target: Opposite band Stop: Beyond the touched band
Confirmation Signals:
- RSI divergence
- Volume spike on bounce
- Candlestick reversal patterns
3. Band Squeeze Breakout #
Setup: Bands contract to narrow range Entry: Trade breakout direction Target: Previous swing high/low Stop: Opposite side of squeeze range
Key Points:
- Wait for confirmed breakout
- Volume should increase on breakout
- False breakouts common – use filters
4. Band Walk Strategy #
Setup: Price consistently touches one band Entry: Don’t fade the trend – trade with it Target: Extended price objectives Stop: Middle band break
Important: Band walks can last longer than expected
Common Settings by Timeframe #
| Timeframe | Period | Std Dev | Strategy Focus |
|---|---|---|---|
| 1-minute | 20 | 2.0 | Scalping reversals |
| 5-minute | 20 | 2.0 | Day trading |
| 15-minute | 20 | 2.0 | Swing entries |
| 1-hour | 20 | 2.0 | Intraday trends |
| Daily | 20 | 2.0 | Position sizing |
| Weekly | 20 | 2.0 | Long-term analysis |
Bollinger Band Indicators #
Bandwidth #
Measures the distance between upper and lower bands: Formula: (Upper Band – Lower Band) / Middle Band × 100
Uses:
- Identify squeeze conditions
- Compare volatility across periods
- Time entry/exit decisions
%B Oscillator #
Shows price position within the bands:
- Values above 80: Potential overbought
- Values below 20: Potential oversold
- Divergences signal potential reversals
Combining with Other Indicators #
RSI + Bollinger Bands #
- RSI overbought + upper band touch = strong sell signal
- RSI oversold + lower band touch = strong buy signal
- Look for divergences between RSI and price
Volume + Bollinger Bands #
- High volume on band touches = more reliable signals
- Low volume squeezes = prepare for breakout
- Volume confirmation crucial for breakouts
MACD + Bollinger Bands #
- MACD divergence + band touch = powerful signal
- MACD histogram + squeeze = breakout direction
- Trend confirmation with band walks
Market Conditions Analysis #
Trending Markets #
Characteristics:
- Frequent band walks
- Bands slope in trend direction
- Middle band acts as support/resistance
Strategy Adjustments:
- Avoid fading band touches
- Use wider stops
- Trade with the trend
Range-Bound Markets #
Characteristics:
- Price bounces between bands
- Horizontal middle band
- Regular reversals at bands
Strategy Adjustments:
- Classic mean reversion works best
- Tight stops acceptable
- Target opposite band
High Volatility Markets #
Characteristics:
- Wide bands
- Frequent band breaks
- Increased false signals
Strategy Adjustments:
- Use wider standard deviations (2.5)
- Require stronger confirmation
- Reduce position sizes
FAQs #
What do Bollinger Bands tell you? #
Bollinger Bands provide three key pieces of information: trend direction (middle band slope), volatility levels (band width), and relative price levels (position within bands). They help identify when prices are relatively high or low and when volatility is expanding or contracting.
How do you read Bollinger Bands for buying and selling? #
Generally, prices touching the lower band suggest potential buying opportunities (oversold), while prices touching the upper band suggest potential selling opportunities (overbought). However, in strong trends, prices can “walk” along a band, so always confirm with other indicators.
What is a good Bollinger Band setting? #
The standard setting (20-period, 2 standard deviations) works well for most situations. Shorter-term traders might use 10-period bands, while longer-term investors might prefer 50-period bands. The 2.0 standard deviation captures about 95% of price action.
What does it mean when Bollinger Bands are tight? #
Tight or “squeezed” Bollinger Bands indicate low volatility and often precede significant price moves. This compression suggests the market is consolidating energy before a potential breakout in either direction.
How reliable are Bollinger Bands? #
Bollinger Bands are most reliable when used with other technical indicators and proper market context. They work best in range-bound markets for mean reversion strategies and can be less reliable during strong trending periods without additional confirmation.
What is the difference between Bollinger Bands and moving averages? #
While both use moving averages, Bollinger Bands add volatility-based upper and lower boundaries. Moving averages show trend direction, while Bollinger Bands also show relative price levels and market volatility conditions.
Can Bollinger Bands predict market direction? #
Bollinger Bands don’t predict direction but help identify potential reversal points and volatility changes. The squeeze pattern can suggest when a significant move is coming, but additional analysis is needed to determine direction.
Tips for Success #
- Don’t Trade Bands in Isolation: Always combine with other indicators like RSI, MACD, or volume analysis
- Understand Market Context: Trending vs. ranging markets require different approaches to band interpretation
- Watch for Squeezes: Band contractions often precede the best trading opportunities
- Respect Band Walks: In strong trends, don’t fight prices that consistently hug one band
- Use Proper Risk Management: Set stops beyond the opposite band when trading reversals
- Consider Timeframe: Match your band settings to your trading timeframe and strategy
- Volume Confirmation: Look for volume spikes to confirm band breakouts and reversals
- Practice Pattern Recognition: Learn to identify squeeze, walk, and bounce patterns quickly
- Backtest Thoroughly: Test your Bollinger Band strategies across different market conditions
- Stay Flexible: Adjust standard deviation settings based on market volatility conditions
Conclusion #
Bollinger Bands remain one of the most versatile and widely-used technical indicators due to their ability to adapt to changing market conditions. Their statistical foundation provides objective measures of volatility and relative price levels, making them valuable for both trend-following and mean-reversion strategies.
The key to successful Bollinger Band trading lies not in finding perfect settings, but in understanding how to interpret band behavior in different market environments. Whether identifying low-volatility squeeze setups, trading mean reversion in range-bound markets, or recognizing trend strength through band walks, these dynamic indicators provide crucial insights into market psychology and price action.
Remember: Bollinger Bands are most powerful when combined with other technical analysis tools and proper risk management. Use them to enhance your market analysis, not as standalone trading signals.