Technical Analysis·Technical Indicators
Bollinger Bands
Volatility in Visual Form
Bollinger Bands, created by John Bollinger in the 1980s, are a volatility indicator that adapts dynamically to market conditions. Unlike fixed support/resistance levels, the bands expand during high-volatility periods and contract during low-volatility periods — making them uniquely responsive to changing market character. Bollinger himself has said the bands are not a standalone trading system but a framework for understanding volatility and identifying relative overbought/oversold conditions.
The mathematical foundation of Bollinger Bands is standard deviation — a statistical measure of how spread out prices are from the average. By plotting bands at 2 standard deviations from a 20-period moving average, approximately 95% of all price action is contained within the bands. When price moves outside the bands, it represents a statistically unusual event — which often has trading implications.
Bollinger Bands · squeeze precedes the move
Definition
Bollinger Bands
Three lines plotted on a price chart: (1) a middle band, typically a 20-period SMA; (2) an upper band, 2 standard deviations above the middle band; (3) a lower band, 2 standard deviations below. Approximately 95% of all price action occurs within the bands. The bands automatically widen in high volatility and narrow in low volatility.
Definition
Bollinger Band Width
A derivative indicator that measures the distance between the upper and lower bands, expressed as a percentage of the middle band. Band width at historic lows indicates a volatility squeeze. Band width at historic highs indicates a volatility expansion. Tracking band width over time helps identify when squeezes are forming.
Definition
%B Indicator
A Bollinger Band derivative that shows where price is relative to the bands. %B of 1.0 means price is at the upper band. %B of 0.0 means price is at the lower band. %B of 0.5 means price is at the middle band. Values above 1.0 or below 0.0 mean price is outside the bands — an unusual event.
Key Bollinger Band Signals
The Squeeze — The Most Important Bollinger Signal
When the bands narrow significantly (a 'squeeze'), volatility is at a low point. This compression typically precedes a major move — the direction of the breakout determines the trade. A squeeze followed by a breakout above the upper band is bullish; below the lower band is bearish. Volatility is mean-reverting: low volatility is always followed by high volatility. The squeeze identifies the calm before the storm.
Trading the Bollinger Band Squeeze
- 1
Identify the squeeze
Look for the bands narrowing to their tightest width in at least 20-30 periods (the more unusual the squeeze, the bigger the expected breakout). Some traders use the Bollinger Band Width indicator to quantify this.
- 2
Wait for the breakout
Do not predict the direction. Wait for price to close outside one of the bands. A close above the upper band is a bullish breakout; below the lower band is bearish.
- 3
Confirm with volume or momentum
The breakout candle should have expanding volume (if available) or a strong momentum indicator reading (RSI moving in the breakout direction, MACD confirming).
- 4
Enter on the breakout
Enter in the direction of the breakout. Stop loss on the opposite side of the middle band (20 SMA) or just inside the opposite band.
- 5
Ride the expansion
After a squeeze breakout, the bands expand rapidly. Price often 'walks' along the outer band. Trail your stop along the middle band to capture the full expansion move.
| Signal | Description | Trading Approach |
|---|---|---|
| Band Squeeze | Bands narrow to their tightest range in 20+ periods | Anticipate a breakout — watch for direction confirmation |
| Upper Band Touch | Price touches or closes above upper band | In trends: momentum continuation. At tops: potential reversal |
| Lower Band Touch | Price touches or closes below lower band | In trends: momentum continuation. At bottoms: potential reversal |
| Middle Band Rejection | Price pulls back to 20 SMA mid-band and bounces | Trend continuation entry — 'mean reversion to trend' |
| Band Walk | Price 'walks' along the upper or lower band for multiple periods | Strong trend — don't fade it! The market is extended and staying that way |
| W-Bottom | Price touches the lower band, bounces, pulls back without touching, rallies | Bullish reversal signal with two tests of the lower band area |
| M-Top | Price touches the upper band, pulls back, pushes back up without touching, reverses | Bearish reversal signal with two tests of the upper band area |
Don't sell just because price hits the upper band
In a strong trend, price can 'walk' the upper band for many periods. Selling every time price touches the upper band in a bull trend is a losing strategy. Context is everything — use the bands to understand volatility character, not as mechanical buy/sell signals. Band touches are only meaningful reversal signals when combined with other evidence (divergence, candlestick patterns, key levels).
Bollinger Band + RSI Combination
One of the most powerful combinations in technical analysis is Bollinger Bands with RSI. When price touches the lower band AND RSI is below 30, the oversold condition is confirmed by two independent methods — significantly increasing reversal probability. This dual confirmation eliminates many of the false signals that either indicator would generate alone.
| Bollinger + RSI Setup | Bollinger Signal | RSI Signal | Combined Probability |
|---|---|---|---|
| Strong bullish reversal | Price at lower band + W-bottom forming | RSI below 30 with bullish divergence | Very High — multiple independent confirmations |
| Strong bearish reversal | Price at upper band + M-top forming | RSI above 70 with bearish divergence | Very High — multiple independent confirmations |
| Trend continuation long | Price bouncing off middle band in uptrend | RSI holding above 50 and rising | High — trend intact with healthy pullback |
| Squeeze breakout long | Bands tight, price breaking above upper band | RSI crossing above 60 with momentum | High — volatility expansion confirmed by momentum |
Confluence entry setup — real-world example
In April 2023, GBP/USD touched the lower Bollinger Band on the daily chart at the 1.2350 zone. Simultaneously, RSI reached 28 (oversold). A bullish hammer candle formed at the same level, which also coincided with the 50-day SMA acting as dynamic support. Four signals converging: band touch, oversold RSI, hammer candle, and 50 SMA support. The pair rallied to 1.2680 over the next week — a 330-pip move from a textbook confluence entry.
Entry
0.6415
Stop
0.6385
Target
0.6495
AUD/USD touched the lower Bollinger Band while RSI hit 27. A bullish hammer candle formed at the same level. Lower band touch + oversold RSI + reversal candle = high-confluence long. Entry above the hammer, stop 30 pips below at prior swing low, target at the middle band and then upper band area.
Adjusting Bollinger Band settings
The standard settings (20, 2) work well on daily charts. For shorter timeframes, consider (10, 1.5) for more sensitive bands. For weekly charts, (20, 2.5) captures more of the price action. Some traders use the middle band period to match their preferred moving average — for example, a 50-period middle band with 2 standard deviations for a broader view.
Knowledge check
The Bollinger Bands on EUR/USD's daily chart are at their tightest squeeze in 6 months. What does this signal?
Knowledge check
Price has been 'walking' along the upper Bollinger Band for 8 consecutive days in a strong uptrend. What does this indicate?