The Bollinger Bands (BB) are a technical analysis tool that measure market volatility. They consist of three lines plotted around the price:
- Middle Band → Simple Moving Average (usually 20-period SMA)
- Upper Band → Middle Band + (2 × standard deviation)
- Lower Band → Middle Band – (2 × standard deviation)
How Bollinger Bands Work
- The distance between the bands expands and contracts based on market volatility
- Narrow bands = low volatility (consolidation)
- Wide bands = high volatility (trend or breakout conditions)
Key Trading Signals
- Price touches upper band → Overbought signal (potential pullback)
- Price touches lower band → Oversold signal (potential bounce)
- Band Squeeze: When bands get very tight, it signals low volatility → often a precursor to a breakout
- Breakouts: When price closes outside the bands, it can indicate strong momentum in that direction
How to Use Bollinger Bands in Trading
- Trend Following:
In strong uptrends, price often “rides” the upper band.
In downtrends, price often hugs the lower band. - Reversal Trading:
Traders sometimes fade moves when price hits the extreme bands (but confirmation is needed). - Combine with RSI:
- Upper band + RSI overbought → stronger reversal signal
- Lower band + RSI oversold → stronger bounce signal
Limitations
- Price can stay at the bands longer than expected → don’t trade blindly on touches
- Works best when combined with momentum indicators (RSI, MACD)
- More reliable on higher timeframes (1H and above)