Bollinger Bands are a volatility indicator consisting of three lines that adapt to market conditions by expanding and contracting based on price volatility.
Components
- Middle Band: 20-period Simple Moving Average (SMA)
- Upper Band: Middle Band + (2 × Standard Deviation)
- Lower Band: Middle Band - (2 × Standard Deviation)
Trading Strategies
1. The Squeeze
- Bands contract during low volatility
- Potential breakout when volatility increases
2. Walking the Bands
- Price consistently touching upper band = Strong uptrend
- Price consistently touching lower band = Strong downtrend
3. Reversal Patterns
- Price bouncing between bands
- Double bottoms/tops at band extremes
Best Practices
- Don’t rely solely on band touches for trades
- Consider overall market trend
- Use with other indicators for confirmation