Bollinger Bands

Bollinger Bands are one of the most powerful tools for measuring volatility, identifying trend strength, and spotting potential breakouts or breakdowns.

Created by John Bollinger in the 1980s, this indicator adapts dynamically to market conditions, making it extremely useful for both trend trading and mean reversion strategies.

 

Bollinger Bands consist of three lines:

• Upper Band – volatility expansion ceiling

• Middle Band (20 SMA) – trend guide

• Lower Band – volatility expansion floor

 

The standard settings are:
20-period SMA, 2 standard deviations, offset = 0.

 

These three lines create a flexible “volatility envelope” around price.

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What Bollinger Bands Measure

Bollinger Bands serve two main purposes:

 

1. Measure the normal trading range

The upper and lower bands define where price typically travels based on volatility.

 

2. Identify contraction and expansion phases

• Contraction (Squeeze) → bands narrow

• Expansion (Breakout/Breakdown) → bands widen

 

These phases show traders when to avoid choppy markets and when to prepare for major moves.

 

Contraction vs Expansion Phases

 

Contraction (Squeeze)

When the upper and lower bands narrow, it signals:

• Low volatility

• Market indecision

• Choppy conditions

• High risk of fakeouts

This is often the worst time to trade. Most traders wait for expansion.​​​​​​​​​​

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Expansion

When the bands widen, it signals:

• Increasing volatility

• New trend forming

• Breakout or breakdown

• High-probability momentum move

The expansion phase is where the best opportunities occur — especially after a tight squeeze.

 

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How to Use Bollinger Bands in Trading

Bollinger Bands can support multiple strategies:

1. Reversion to the Mean

• Price tags the upper band → expect a move back toward the middle band

• Price tags the lower band → expect a move back toward the middle band

This is a classic mean-reversion setup.

 

2. Mid-Band Trend Trading

The middle band (20 SMA) acts as a trend filter:

• Price above the mid band = uptrend

• Price below the mid band = downtrend

Breaks above/below the mid band often signal continuation toward the outer bands.

 

3. Breakouts from Compression

Most powerful moves form after:

• Tight bands

• Flat mid-band

• Silent volume

Once expansion begins, price often trends in one direction for an extended move.

 

4. Upper/Lower Band Targets

Bands can be used as:

• Profit targets

• Reversal zones

• Risk management guides

Traders often pair Bollinger Bands with indicators like MACD, RSI, or Stochastics to refine entries.

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Amazon (AMZN) Example Breakdown

 

The Amazon (NASDAQ: AMZN) 15-minute candlestick chart illustrates the Bollinger Bands perfectly in action. Starting from the left side of the chart, notice how a compression phase forms as the upper and lower bands tighten. This leads to a breakdown, followed by a rejection off the mid-band as price fails to reclaim trend, resulting in a sell-off toward the lower band.

 

After hitting the lower band, AMZN enters another compression phase, signaling a pause before the next move. The bands then begin to widen as AMZN expands upward, grinding toward the upper band. Price eventually forms a short-term peak near the upper band before reverting back toward the mid-band, and briefly toward the lower band again.

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This cycle repeats:

• Compression → Expansion → Reversion → Compression
  showing how Bollinger Bands guide traders through trend continuation, reversals, and volatility shifts.

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Alternate Bollinger Band Settings

Experienced traders sometimes adjust BB settings in volatile markets:

 

For high volatility:

• Increase standard deviation to 2.618

• Allows bands to expand with wider price swings

 

For tight, range-bound markets:

• Reduce period

• Apply negative offsets

• Creates tighter bands for faster signals

 

Bollinger Bands are flexible — traders can tune them to match market conditions.

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Key Takeaways

• Bollinger Bands measure volatility through expansion and contraction

• Contraction = chop; Expansion = trend

• Middle band acts as trend guide

• Upper/lower bands act as reversal or target zones

• Best used with momentum indicators (MACD, RSI, Stochastics)

• Breakouts after compression generate major moves

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Pro Tips

• The tighter the Bollinger Band squeeze, the bigger the breakout that follows.

• Use the middle band (20 SMA) as a trend confirmation line—price above = bullish.

• Tagging the upper or lower band alone is not a reversal signal—wait for confirmation.

• Expansion + consecutive closes outside the band often signals a strong trend wave.

• Combine BB squeezes with EMAs or MACD for powerful early breakout entries.

• Bands work best in trending markets—avoid band trading during low-volume chop.