Bullish Signals
- Price bounces off the lower band and moves toward the middle band (Bollinger Bounce)
- Squeeze breakout to the upside with expanding bands and rising volume
- Price crosses above the middle band (20 SMA) and holds, signaling upward momentum
- %B rises from below 0 back above 0.2, indicating oversold recovery
Bearish Signals
- Price rejected at the upper band with a reversal candle (shooting star, engulfing)
- Squeeze breakout to the downside with expanding bands and heavy selling volume
- Price drops below the middle band (20 SMA) and fails to reclaim it
- %B falls from above 1 back below 0.8, suggesting overbought reversal
What Are Bollinger Bands?
Bollinger Bands are a volatility indicator developed by John Bollinger in the 1980s. They consist of three lines plotted on a price chart: a middle band (typically a 20-period simple moving average), an upper band set 2 standard deviations above the middle, and a lower band set 2 standard deviations below. The bands dynamically widen and narrow based on market volatility.
The core insight is that roughly 95% of price action falls within 2 standard deviations of the mean. When price reaches the outer bands, it is statistically extended. When the bands contract (a squeeze), it signals that a period of low volatility is about to give way to a significant move. Bollinger Bands do not predict direction on their own, but they excel at identifying when a move is likely imminent.
How to Use Bollinger Bands
The Bollinger Bounce: In a range-bound market, price tends to oscillate between the upper and lower bands. Traders buy near the lower band and sell near the upper band. The middle band often acts as a dynamic support or resistance level. This strategy works best when the ADX is below 25, confirming the absence of a strong trend.
The Bollinger Squeeze: When bandwidth (the distance between upper and lower bands) reaches a multi-week low, a squeeze is in effect. This means volatility is compressed and a breakout is building. Traders wait for price to close decisively outside either band with above-average volume, then enter in the breakout direction. The squeeze is one of the most reliable setups in technical analysis because volatility is cyclical: low volatility always precedes high volatility.
Walking the Bands: In a strong uptrend, price will hug the upper band, with pullbacks finding support at the middle band. In a strong downtrend, price walks along the lower band. This is not a signal to fade the move. Instead, traders should recognize that walking the bands indicates powerful momentum and use pullbacks to the middle band as entry opportunities.
%B and Bandwidth: %B measures where price sits relative to the bands (0 = lower band, 1 = upper band). Bandwidth measures the distance between bands as a percentage of the middle band. Low bandwidth values identify squeezes quantitatively, while %B helps pinpoint overbought and oversold extremes.
Common Mistakes
Trading bands in isolation: The most frequent error is blindly buying at the lower band and selling at the upper band without confirming context. In a strong downtrend, price can walk the lower band for weeks. Always check whether the market is trending or ranging before applying a bounce strategy.
Ignoring the squeeze: Many traders overlook the squeeze because price action appears boring during low-volatility periods. But the squeeze is where the most explosive setups form. Use bandwidth or a Bollinger Band squeeze indicator to alert you when compression reaches extreme levels.
Wrong standard deviation: Using bands that are too tight (1 SD) will generate excessive false signals, while bands that are too wide (3 SD) will rarely be reached. The standard 2 SD setting is statistically sound for most markets and timeframes. Only adjust after testing on your specific instrument.
No confirmation: Always confirm band signals with volume and a momentum indicator like RSI or MACD. A touch of the lower band with RSI divergence is far more reliable than a band touch alone.
Recommended Settings
| Setting | Period | Std Dev | Best For |
|---|---|---|---|
| Standard | 20 | 2.0 | Swing trading, daily charts. The default and most widely used setting. |
| Tight | 20 | 1.5 | Day trading, scalping. Generates more signals but more false positives. |
| Wide | 20 | 2.5 | Position trading, weekly charts. Fewer signals, higher reliability. |
Frequently Asked Questions
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Part of our Technical Analysis Guide