Created by John Bollinger | Provide insights on price and volatility
About Bollinger Bands
Created by John Bollinger. These bands provide unique insights into prices and volatilities. Bollinger bands can be used to determine overbought and oversold levels, as a trend-following tool and to determine when a breakout occurs.
Bollinger Bands consist of three lines/bands:
1. Simple Moving Average (SMA) in the middle. Usually an SMA 20. It is also known as Middle Band or Middle Bollinger
2. Upper band or normally called Upper Bollinger Band (SMA20 + standard deviation)
3. Lower Band or normally called Lower Bollinger Band (SMA20 – standard deviation)
Traders can also add additional bands, to help gauge the strength of the price moves. When market volatility is down the bands contract, and when market is volatile, the bands widen. A contraction in the bands is considered to be potential signs of significant breakout in the future.
Price tends to move to the middle band after up/down move. When price bounce off the middle band after an up move then open BUY. When price bounce off the middle band after down move then open SELL.
Squeeze happens when the bands contract. Low volatility. Considered to be potential signs of significant breakout in the future. If prices start to break out above upper band, then BUY. If prices start to break below lower band, then SELL.
Look for prices that are moving sideways and stuck in a range. When sideways-shaped Bollinger Bands is formed, traders will take advantage by trading the bands. BUY around the lower band and SELL around the upper band.
Chart below shows a down move from A to B. Price then moved to the middle band but unable to break the middle band and bounced off it. Trade to take was to SELL at the open of next bar/candle. Conversely, if after an up move price corrects itself to the middle band but unable to break the middle band and bounced off it, then BUY at the open of the next bar/candle.
A squeeze happens when bollinger bands contract due to low volatility. Please keep in mind that a squeeze only indicates possible significant breakout in the future. It does not predict the direction of the breakouts. The bands that prices break next, usually indicate the direction. The tighter the squeeze, the more significant the breakouts.
Chart below shows two examples of a squeeze and how to trade it. In example A, the bands contracted and then price broke above the upper band (1). BUY at the open of the next bar/candle. In example B, the bands contracted and then price broke below the lower band (2). SELL at the open of the next bar/candle.
Bollinger bands act like dynamic support and resistance levels. As with other technical analysis tools, the longer the time frame you are in, the stronger these bands tend to be. It should also be remembered that Bollinger bands is not a standalone trading system and should be combined with other technical analysis tools.