Bollinger Bands
Type: Volatility
Bollinger Bands use standard deviation to create a dynamic volatility envelope around price. They expand when markets are volatile and contract when they're quiet — giving traders a visual measure of relative price levels and volatility conditions.
How it Works
Bollinger Bands consist of three lines: a middle band (typically a 20-period simple moving average), an upper band (middle band + 2 standard deviations), and a lower band (middle band − 2 standard deviations).
Statistically, roughly 95% of price action falls within the bands when using 2 standard deviations. When price reaches the upper or lower band, it's considered statistically extended relative to recent price behaviour.
How to Read It
Wide bands indicate high volatility. Narrow bands indicate low volatility — this is known as a 'squeeze' and often precedes a breakout.
Price touching the upper band doesn't automatically mean sell, nor does touching the lower band mean buy. In trending markets, price can 'walk the band' — staying near the upper or lower band for extended periods.
Key Signals
• Band squeeze: Bands narrow significantly, signalling compressed volatility and a likely breakout incoming.
• Breakout from squeeze: Price breaks decisively above or below the bands after a squeeze — direction of break indicates likely trend direction.
• Reversion to mean: In ranging markets, price touching the upper band may reverse toward the middle band (and vice versa).
• Walking the band: In trending markets, price hugging the upper/lower band confirms trend strength — don't fade this.
Limitations
• Bollinger Bands don't tell you direction — just volatility. You need other indicators to determine trend and momentum.
• The 'mean reversion' strategy fails in trending markets. Fading a move that's walking the band will hurt you.
• Band touches are not buy or sell signals on their own. Context — trend, volume, other indicators — is essential.
Trader's Tip: The most reliable Bollinger Band setups come after a squeeze. Watch for low-volatility compression, then trade the breakout in the direction confirmed by MACD or a moving average trend filter.