What if you could see volatility on your chart? Bollinger Bands do exactly that—they visually display how much prices are fluctuating, helping you spot potential reversals and breakouts before they happen.
What Are Bollinger Bands?
Developed by John Bollinger in the 1980s, Bollinger Bands consist of three lines plotted on a price chart:
- Middle Band: A 20-period Simple Moving Average (SMA)
- Upper Band: Middle band + 2 standard deviations
- Lower Band: Middle band - 2 standard deviations
The key insight? The bands automatically expand when volatility increases and contract when volatility decreases. This dynamic nature makes them incredibly useful for reading market conditions.
How Bollinger Bands Work
Volatility Measurement
Standard deviation measures how spread out prices are from the average. When prices swing wildly, standard deviation increases, and the bands widen. When prices move calmly, the bands squeeze together.
Wide bands = High volatility Narrow bands = Low volatility
The 95% Rule
Statistically, about 95% of price action should occur within two standard deviations of the mean. This means prices that touch or move outside the bands represent relatively extreme moves.
Mean Reversion
A core concept behind Bollinger Bands is mean reversion—the tendency of prices to return to their average after moving to extremes. When price touches the upper band, it's "stretched" above average. When it touches the lower band, it's "stretched" below.
Reading Bollinger Bands
| Price Position | Interpretation |
|---|---|
| Near upper band | Potentially overbought; price is high relative to recent average |
| Near middle band | Price is at its average; neutral zone |
| Near lower band | Potentially oversold; price is low relative to recent average |
| Outside upper band | Extreme strength or potential exhaustion |
| Outside lower band | Extreme weakness or potential reversal |
Important: "Overbought" doesn't mean "sell now," and "oversold" doesn't mean "buy now." These are conditions, not signals.
The Bollinger Band Squeeze
The squeeze is one of the most powerful Bollinger Band setups.
What It Is
When the bands contract to unusually narrow levels, it signals low volatility—but low volatility doesn't last forever. A squeeze often precedes a significant move in either direction.
How to Trade It
- Identify the squeeze — Bands become the narrowest they've been in weeks
- Wait for the breakout — Don't predict direction; let price tell you
- Confirm with a close — A candle closing outside the bands confirms the breakout
- Enter in the breakout direction — Long if price breaks above; short if below
- Use the opposite band as initial target — Or trail your stop as the trend develops
Pro tip: The longer the squeeze, the more powerful the eventual breakout tends to be.
Key Bollinger Band Strategies
Strategy 1: The Bollinger Bounce (Mean Reversion)
This strategy bets that price will return to the middle band after touching an outer band.
Setup:
- Price touches or exceeds the lower band (for longs) or upper band (for shorts)
- Look for reversal candlestick patterns (hammer, engulfing, doji)
- Enter toward the middle band
Stop-loss: Below the recent low (longs) or above recent high (shorts) Target: The middle band (20 SMA)
Best markets: Ranging, sideways markets where prices are oscillating
Warning: This strategy fails in strong trends when prices can "ride" along a band.
Strategy 2: Riding the Band (Trend Following)
In strong trends, price doesn't bounce—it hugs the upper or lower band.
Signs of a band ride:
- Price repeatedly touches or exceeds one band
- Pullbacks only reach the middle band, then resume
- The middle band itself is sloping in the trend direction
How to trade:
- In an uptrend, buy pullbacks to the middle band
- In a downtrend, sell rallies to the middle band
- Use the opposite band as a warning sign of exhaustion
Strategy 3: W-Bottoms and M-Tops
John Bollinger himself identified these reversal patterns.
W-Bottom (Bullish Reversal):
- Price makes a low and touches or breaks the lower band
- Price bounces to the middle band
- Price makes a second low, but this time stays above the lower band
- The "failure" to break lower suggests sellers are exhausted
- Buy on breakout above the middle bounce high
M-Top (Bearish Reversal):
- Price makes a high and touches or breaks the upper band
- Price pulls back to the middle band
- Price makes a second high, but this time stays below the upper band
- Buy on breakdown below the middle pullback low
Strategy 4: Double Bollinger Bands
Advanced traders use two sets of Bollinger Bands:
- Inner bands: 1 standard deviation
- Outer bands: 2 standard deviations
Interpretation:
- Price between inner bands: Neutral zone, no trend
- Price between inner and outer bands: Trending
- Price outside outer bands: Extreme move, watch for reversal
Combining Bollinger Bands with Other Indicators
John Bollinger recommends using 2-3 additional indicators for confirmation:
RSI (Relative Strength Index)
- Price at lower band + RSI oversold (<30) = Stronger buy signal
- Price at upper band + RSI overbought (>70) = Stronger sell signal
- RSI divergence at band touch = High-probability reversal
MACD
- Bollinger squeeze + MACD histogram turning positive = Bullish breakout likely
- Bollinger squeeze + MACD histogram turning negative = Bearish breakout likely
Volume
- Band breakout with high volume = Confirmed, likely to continue
- Band breakout with low volume = Suspect, likely to fail
Customizing Bollinger Bands
The default settings (20-period SMA, 2 standard deviations) work for many situations, but you can adjust:
| Trading Style | Period | Standard Deviations |
|---|---|---|
| Day trading | 10-12 | 1.5-2 |
| Swing trading | 20 (default) | 2 |
| Position trading | 50 | 2.5 |
Tips:
- Shorter periods = More signals, more noise
- Longer periods = Fewer signals, smoother bands
- Fewer standard deviations = Tighter bands, more touches
- More standard deviations = Wider bands, rarer touches
Common Bollinger Band Mistakes
1. Using Bands Alone as Buy/Sell Signals
Touching the lower band is not a buy signal. Touching the upper band is not a sell signal. These are conditions that require confirmation.
2. Fighting Strong Trends
In powerful trends, price can ride the band for extended periods. Shorting every touch of the upper band in a bull market is a recipe for losses.
3. Ignoring the Squeeze
The squeeze is Bollinger Bands' most valuable pattern. Don't just watch band touches—watch band width.
4. Forgetting They're Lagging
Bollinger Bands are based on historical data. They show where volatility has been, not where it will be. Use them as context, not prediction.
5. Not Adapting to Market Conditions
Mean reversion strategies work in ranges. Trend-following strategies work in trends. Know which environment you're in.
Practical Exercise
- Open any chart and apply Bollinger Bands (default settings)
- Find periods where bands squeezed tight
- Observe what happened after each squeeze
- Identify W-bottoms or M-tops
- Notice when price "rode" a band in a trend
- Practice identifying which strategy would have worked best
Key Takeaways
- Bollinger Bands measure volatility through expanding and contracting widths
- The middle band is a 20-period moving average; outer bands are ±2 standard deviations
- Squeeze patterns (narrow bands) often precede big moves
- Mean reversion works in ranges; trend-following works in trends
- W-bottoms and M-tops are powerful reversal patterns
- Always combine with other indicators for confirmation
- Price can ride bands in strong trends—don't automatically fade extremes
Bollinger Bands give you a visual map of volatility. Once you learn to read the bands' width and price's relationship to them, you'll have a powerful tool for timing entries and identifying market conditions.
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