Bollinger Bands are a technical indicator developed by John Bollinger. They consist of three lines: a middle band (20 SMA) and two outer bands (plus/minus 2 standard deviations).

Components

  • Upper Band = 20 SMA + (2 x Standard Deviation)
  • Middle Band = 20 SMA
  • Lower Band = 20 SMA - (2 x Standard Deviation)

Trading Signals

1. Band Squeeze

  • Bands narrow — Low volatility
  • Often precedes a big move
  • Direction unknown until breakout

2. Band Walk

  • Price rides along upper band — Strong uptrend
  • Price rides along lower band — Strong downtrend

3. Mean Reversion

  • Price touches upper band — Potential sell
  • Price touches lower band — Potential buy
  • Works in ranging markets

Key Points

  • Bands expand in volatile markets, contract in quiet ones
  • Price outside bands is not automatically a signal
  • Default: 20 period, 2 standard deviations
  • Combine squeeze with direction indicators