What Are Bollinger Bands?
Bollinger Bands are a volatility indicator created by John Bollinger in the 1980s. They consist of three lines plotted around a moving average — an upper band, a lower band, and the middle band (SMA). The bands expand and contract based on market volatility.
Unlike fixed-percentage envelopes, Bollinger Bands adapt to changing market conditions. When volatility increases, the bands widen. When it decreases, they tighten. This makes them uniquely effective for identifying breakouts, reversals, and trading ranges.
Bands widen = high volatility; narrow = low volatility
Price tends to return to the middle band (the average)
Band squeezes often precede explosive moves
Price at upper band = overbought, lower = oversold
Bollinger Bands Components
Bollinger Bands have three components, each serving a distinct purpose. Understanding how they're calculated helps you interpret signals more effectively.
Upper Band
Represents the upper boundary of "normal" price movement. Price touching or exceeding this band may indicate overbought conditions.
- Acts as dynamic resistance
- Price closing above = strong bullish momentum
- Multiple touches without break = selling pressure
Middle Band (SMA)
The backbone of Bollinger Bands. It represents the medium-term trend and acts as a natural support/resistance level.
- Primary trend direction indicator
- Price above = bullish bias, below = bearish
- Often the first profit target for mean-reversion trades
Lower Band
Represents the lower boundary. Price touching or breaking below may indicate oversold conditions and potential buying opportunities.
- Acts as dynamic support
- Price closing below = strong bearish momentum
- Bounces off lower band = potential reversal
Bollinger Bands in Action
The chart below shows candlestick price data with Bollinger Bands overlaid — calculated using a 20-period SMA and 2 standard deviations. Notice how the bands expand during volatile breakouts and contract tightly during low-volatility squeeze phases.
The Bollinger Squeeze
The Bollinger Squeeze is the most powerful signal Bollinger Bands produce. It occurs when volatility drops to extremely low levels, causing the bands to contract tightly around price. Like a coiled spring, this compression is usually followed by an explosive breakout.
Compression
Bands narrow significantly as volatility drops. The bandwidth (distance between upper and lower bands) reaches multi-week or multi-month lows. This is the setup phase — the market is coiling.
Breakout Trigger
Price breaks decisively above the upper band or below the lower band with increased volume. This is the moment the spring releases. The direction of the break indicates the trend.
Expansion
Bands rapidly widen as volatility explodes. Price tends to "walk the band" — staying near the upper or lower band as the trend develops. This phase can last days to weeks.
Bollinger Bands Trading Strategies
1. Bollinger Bounce (Mean Reversion)
Price tends to return to the middle band. When price touches the lower band in an uptrend, it often bounces back. The opposite in a downtrend.
2. Squeeze Breakout
Trade the explosive move after a period of low volatility. This is the highest-reward Bollinger Band setup.
3. Double Bottom (W-Pattern)
A classic Bollinger reversal pattern. Price makes two lows — the first at or below the lower band, the second above it. This signals weakening bearish momentum.
Optimal Bollinger Band Settings
The default 20-period SMA with 2 standard deviations works well for most situations, but you can adjust settings for different trading styles.
Frequently Asked Questions
What do Bollinger Bands tell you?
Bollinger Bands tell you three things: the trend direction (via the middle band slope), volatility levels (band width), and potential overbought/oversold conditions (when price touches the outer bands). They are most useful for identifying squeeze setups that precede breakouts and for mean-reversion trades when price touches the outer bands.
What is a Bollinger Band squeeze?
A Bollinger Band squeeze occurs when the bands contract to their narrowest width in recent history, indicating extremely low volatility. This compression typically precedes an explosive price move in one direction. Traders watch for the breakout direction and enter accordingly, as squeezes have historically led to some of the strongest trending moves.
Are Bollinger Bands good for crypto?
Yes, Bollinger Bands are excellent for crypto trading because crypto markets are highly volatile. The bands adapt to volatility automatically. However, consider using 2.5 standard deviations instead of the default 2 to account for crypto's wider price swings. The squeeze setup is particularly effective in crypto markets.
What is the best timeframe for Bollinger Bands?
The 4-hour and daily timeframes work best for most traders. The 4H chart provides good intraday signals while filtering out noise, and the daily chart gives the most reliable squeeze and breakout signals. For scalping, you can use 15-minute or 1-hour charts with adjusted settings (10-period, 1.5 standard deviations).
Should I sell when price touches the upper Bollinger Band?
Not automatically. In strong uptrends, price can "walk the upper band" for extended periods. A touch of the upper band in a ranging market suggests an overbought condition, but in a trending market, it shows strength. Look for additional confirmation like RSI divergence, bearish candle patterns, or declining volume before selling.
How do Bollinger Bands differ from Keltner Channels?
Both are envelope indicators, but Bollinger Bands use standard deviation (volatility-based) while Keltner Channels use ATR (range-based). Bollinger Bands are more responsive to sudden volatility spikes. Many traders use both together — when Bollinger Bands contract inside Keltner Channels, it signals an especially tight squeeze with high breakout potential.
Practice Trading with Bollinger Bands
Mock Trade Challenge
Identify squeezes and breakouts to time your trades.
Bollinger Bands have been squeezing for 15 candles and price just broke above the upper band with volume...
What would you do here?
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