Bollinger Bands are a volatility-based technical indicator developed by John Bollinger in the 1980s. The indicator consists of three lines: a middle band (usually a 20-period simple moving average), an upper band, and a lower band. The upper and lower bands are placed at a set number of standard deviations (commonly 2) above and below the moving average. As price volatility increases or decreases, the bands widen or narrow. Bollinger Bands help traders identify price breakouts, volatility shifts, overbought/oversold conditions, and potential trend reversals.
💡 Significance
- Shows price volatility by expanding and contracting with market activity.
- Identifies overbought and oversold levels when price touches or moves beyond the bands.
- Signals possible breakouts or reversals when price breaks above or below the bands.
- Helps define price targets during trending moves.
- Effective in range-bound and trending markets when combined with other indicators.
📊 Indicator Components & Values
- Middle Band → 20-period Simple Moving Average (SMA) of price.
- Upper Band → SMA + (2 × standard deviation); represents overbought zone.
- Lower Band → SMA − (2 × standard deviation); represents oversold zone.
- Band Width → The distance between upper and lower bands; shows market volatility.
- Price Position →
- Near Upper Band → May indicate overbought conditions.
- Near Lower Band → May indicate oversold conditions.
🎯 Trading Strategy
- Bounce Strategy → Buy when price touches the lower band and reverses upward; sell when price hits the upper band and reverses downward.
- Breakout Strategy → Enter a trade when price closes outside the bands, expecting strong continuation in that direction.
- Bollinger Squeeze → When bands narrow, it indicates low volatility and a possible upcoming breakout.
- Bollinger Bands + RSI → Use RSI to confirm overbought or oversold signals when price touches the bands.
- Bollinger Bands + Moving Average → Enter trades in the trend direction when price rides along the bands and stays above or below the middle band.