Bollinger Bands are a technical analysis tool developed by John Bollinger in the 1980s to measure market volatility and identify potential overbought or oversold conditions. They consist of three lines plotted on a price chart:
- Middle Band: A simple moving average (typically 20-period SMA)
- Upper Band: Two standard deviations above the moving average
- Lower Band: Two standard deviations below the moving average
These bands dynamically expand and contract based on price volatility—widening during high volatility and narrowing during calm periods. When price approaches the upper band, traders may consider it overbought; when it nears the lower band, they may view it as oversold. However, touching a band isn’t a standalone signal—price can “walk the band” during strong trends, so traders often pair Bollinger Bands with other indicators like RSI or MACD for confirmation
Bollinger Bands Squeeze & Breakout Strategy
Scenario: A stock has been trading in a tight range, and the Bollinger Bands are narrowing—indicating low volatility.
Setup:
- Trigger: Bands begin to “squeeze” (contract), suggesting a buildup before a potential breakout.
- Confirmation: Price closes above the upper band with rising volume.
- Entry: Long position on breakout candle above the upper band.
- Stop: Just below the middle band (20-period SMA).
- Target: Measured move based on prior range width or Fibonacci extension.
Narrative Fit: This setup is ideal for capturing volatility expansion after a period of consolidation—often seen before earnings releases, macro catalysts, or sector rotations.
