CourseTechnical Indicators
Bollinger Bands
Bollinger Bands, created by John Bollinger, are a volatility indicator that creates a price envelope around a moving average. They dynamically adjust to market conditions — expanding during high volatility and contracting during low volatility.
Bollinger Band Components
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)
The Bollinger Squeeze
When the bands narrow (squeeze), it indicates low volatility — often a precursor to a significant price move. Think of it as a coiled spring. The longer the squeeze, the more explosive the breakout tends to be. Watch for volume confirmation when the bands start expanding.
Trading with Bollinger Bands
Common strategies:
- Mean reversion: buy at the lower band, sell at the upper band (works in ranging markets)
- Bollinger Squeeze breakout: trade the direction of the breakout after a squeeze
- Walking the bands: in strong trends, price can "walk" along the upper or lower band
- W-bottoms and M-tops: double bottom/top patterns using the bands as reference
Pro Tip
Bollinger Bands work best in combination with RSI. When price touches the lower band AND RSI is below 30, the oversold signal is much stronger than either indicator alone.
Key Takeaways
- Bollinger Bands consist of a 20 SMA with upper/lower bands at 2 standard deviations
- Bands expand with high volatility and contract with low volatility
- The Bollinger Squeeze signals an upcoming significant move
- In trends, price can "walk" along the bands
- Combine with RSI for stronger overbought/oversold signals