Mastering Bollinger Bands: Strategies and Insights

Bollinger Bands were created by John Bollinger in the 1980s, and are one of the most versatile and widely used volatility indicators in technical analysis.

They consist of three components:

1. A moving average (typically 20-period SMA)
2. An upper band = MA + (2 * standard deviation)
3. A lower band = MA – (2 * standard deviation)

The bands expand and contract based on market volatility. Bollinger Bands are not buy or sell signals by themselves, but a framework for judging price action.

John Bollinger’s Core Principles:

• Use Bollinger Bands with price action, volume, and confirmation indicators.
• Band “tags” are not reversal signals by themselves.
• Price can “walk the band” in strong trends.
• Look for squeezes (low volatility) followed by breakouts.

Key Bollinger Band Strategies:

1. The Squeeze

• Bands contract during low volatility.
• A breakout from the squeeze often leads to strong directional moves.
• Confirm with volume surge or trend indicator (e.g., MACD).

1. Riding the Band

• In trending markets, price may hug the upper or lower band.
• In an uptrend: buy near middle band (20-SMA), exit near upper band.
• In a downtrend: short near middle band, cover near lower band.

1. Double Bottom with Band Tag

• First low touches lower band, second low holds above band.
• Used as a bullish reversal setup, especially when RSI confirms divergence.

1. Reversal on Exhaustion

• Price pierces upper/lower band with high volume and reversal candlestick.
• Watch for pin bars or engulfing candles.
• Best when combined with overbought/oversold indicators.

John Bollinger’s Favorite Confirmation Tools:

• Relative Strength Index (RSI)
• Volume indicators (e.g., On-Balance Volume)
• Pattern recognition (double bottoms, W-bottoms)

Common Misconceptions:

• Bollinger Bands are NOT static buy/sell zones.
• Price crossing a band does NOT mean automatic reversal.
• Bands must be interpreted in context with trend and volatility.

Recommended Settings:

• 20-period SMA
• 2 standard deviations
• For faster reaction: use 10-period SMA with 1.5 std dev
• For smoother signals: 50 SMA with 2.5 std dev (used in longer timeframes)

Bollinger Bands work best when combined with other signals in a rule-based system. They are a volatility lens to help traders identify breakout conditions, mean-reverting moves, and continuation patterns with clarity.

Visual Example: Bollinger Bands