What are Bollinger Bands?
Bollinger Bands, developed by John Bollinger in the 1980s, consist of three lines: a 20-period simple moving average (middle band), an upper band at 2 standard deviations above, and a lower band at 2 standard deviations below. Statistically, approximately 95% of price action falls within the bands when using 2 standard deviations. The bands automatically widen during high-volatility periods and narrow during low-volatility periods, providing a dynamic framework for assessing whether prices are relatively high or low.
Trading Strategies with Bollinger Bands
The Bollinger Squeeze occurs when the bands narrow to their tightest point in several months, signaling that a significant price move is imminent, though not its direction. Mean-reversion traders buy when price touches the lower band and sell at the middle band, a strategy that works well in ranging markets. In trending markets, prices can 'walk the band,' repeatedly touching or exceeding the upper band during uptrends. Combining Bollinger Bands with RSI helps distinguish between mean-reversion opportunities and trend-continuation signals.
Key Considerations
A touch of the upper or lower band is not automatically a sell or buy signal. Bollinger himself emphasizes that the bands provide relative definitions of high and low, not absolute trading signals. The default 20-period, 2-standard-deviation settings work for most timeframes, but shorter-term traders may use 10-period bands with 1.5 standard deviations. Always confirm band signals with volume and other indicators before entering trades, as false breakouts beyond the bands are common in low-liquidity environments.