Bollinger Bands: Measuring Volatility and Finding Entries

Bollinger Bands are a volatility indicator that creates a channel around price. When the bands are wide, volatility is high. When they’re narrow, volatility is low. Traders use Bollinger Bands to identify potential breakouts, reversals, and overbought/oversold conditions.

How Bollinger Bands Work

Three lines:

• Middle band: A 20-period Simple Moving Average (SMA)
• Upper band: Middle band + 2 standard deviations
• Lower band: Middle band – 2 standard deviations

Statistically, approximately 95% of price action falls within the bands. When price touches or exceeds a band, it’s a statistically unusual event.

Trading Strategies

The Squeeze

When bands narrow significantly (a “squeeze”), it means volatility has compressed. This often precedes a major move. The direction of the breakout is unknown, but the magnitude is usually significant. Watch for which band price breaks through first.

Band Bounces

In ranging (sideways) markets, price tends to bounce between the upper and lower bands:

• Price touches lower band → potential buy opportunity
• Price touches upper band → potential sell opportunity
• Works best when there’s no strong trend

Band Walks

In strong trends, price can “walk” along a band — consistently touching or exceeding it:

• Price walking along the upper band = strong uptrend (NOT a sell signal)
• Price walking along the lower band = strong downtrend (NOT a buy signal)
• A band walk ending (price moves back toward the middle) = trend may be weakening

Bollinger Bands + RSI Combo

Powerful combination:

• Price at lower Bollinger Band + RSI below 30 = strong oversold signal (potential buy)
• Price at upper Bollinger Band + RSI above 70 = strong overbought signal (potential sell)
• Confirmation from both indicators increases probability of success

Key Settings

• Default (20, 2): 20-period SMA with 2 standard deviations. Good for most uses.
• Wider bands (20, 2.5): Fewer signals but more reliable. Price touching the bands is more significant.
• Narrower bands (20, 1.5): More signals but more noise. Better for shorter timeframes.

Common Mistakes

• Selling just because price touches the upper band in an uptrend (band walk)
• Buying just because price touches the lower band in a downtrend
• Using Bollinger Bands alone — always confirm with other indicators