Bollinger Bands — Volatility and Trading Setup

What Bollinger Bands are

Bollinger Bands plot three lines:

• Middle: a 20-period moving average.
• Upper band: the MA plus two standard deviations.
• Lower band: the MA minus two standard deviations.

Price usually stays between the two bands. When it pushes outside, volatility has spiked.

How to read them

• The squeeze. When the bands narrow, volatility is low and the market is quiet. Squeezes often precede a breakout, so they are worth watching — but a squeeze can last for weeks before anything happens.
• Touching the upper band. Price at or above the upper band suggests it is stretched (overbought) and may pull back.
• Touching the lower band. Price at or below the lower band suggests it is stretched (oversold) and may bounce.

A common target after a band touch is a move back toward the middle band.

Band width is volatility

Narrow bands mean low volatility; wide bands mean high volatility. A breakout out of a squeeze, with expanding bands, tends to move quickly.

Common mistakes

• Buying the instant price touches the lower band. It can keep falling. Look for confirmation from volume or the moving average first.
• Expecting too much from a bounce. Aim for the middle band rather than assuming a full reversal.
• Using bands in a strong trend as if it were ranging. In a powerful trend, price can "walk the band" for a long time.

Pairing with RSI

Bands work well alongside RSI: price at the lower band and RSI below 30 is a stronger oversold reading than either alone.

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