What are Bollinger Bands?
Learn how Bollinger Bands measure volatility and help you spot when stocks are ready to move.
Quick Answer
Bollinger Bands are three lines that create a "channel" around a stock's price. When the bands squeeze together = low volatility (big move coming soon). When price touches the upper band = overbought. Lower band = oversold. Think of them like a rubber band—the tighter they squeeze, the harder they snap back.
The Three Lines Explained
Upper Band (Top Line)
The ceiling. When price touches this, the stock might be overbought (too expensive, might drop). Strong stocks can "walk" this line for weeks during powerful uptrends.
Middle Band (Center Line)
The average price (20-day moving average). Acts like a magnet—price tends to return to it. When price is above = bullish. Below = bearish.
Lower Band (Bottom Line)
The floor. When price touches this, the stock might be oversold (too cheap, might bounce). Good buying opportunity in uptrends, danger zone in downtrends.
Fun fact: The bands automatically widen when volatility increases and narrow when things calm down. They adapt to market conditions in real-time!
Real Trading Examples
The Bollinger Bounce
Netflix (NFLX) - Trading range: $400-$450
Stock drops to $400 and touches lower band
Oversold signal in an uptrend
↓
Buy at $400 (lower band touch)
↓
Price bounces back to middle band ($425), then upper band ($450)
12.5% gain by riding the bounce
The Bollinger Squeeze
AMD - Stock consolidating at $120
Bands squeeze to narrowest range in 6 months
Low volatility = big move coming (but which direction?)
↓
Wait for breakout... Price explodes to $135 (breaks upper band)
↓
Buy on breakout confirmation at $125
↓
Ride the momentum to $140 as bands widen
12% gain by catching the volatility expansion
The False Breakout Trap
Penny Stock XYZ
Price breaks above upper band on low volume
Weak breakout (no volume confirmation)
↓
FOMO buyers jump in at $5.50
↓
Price immediately reverses, falls back inside bands to $4.80
13% loss from chasing false breakout
Trading Strategies with Bollinger Bands
1. Bollinger Bounce Strategy
Best for: Ranging, sideways markets
Buy when price touches lower band
Sell when price touches upper band
Works like buying support, selling resistance. Price oscillates between bands.
2. Bollinger Squeeze Strategy
Best for: Breakout traders
Watch for bands to squeeze tight (lowest width in months)
Wait for price to break above or below bands
Enter in breakout direction with strong volume
The calm before the storm. Tight bands = volatility explosion incoming.
3. Band Walking Strategy
Best for: Strong trending markets
→ In strong uptrends, price "walks" along upper band
→ Don't sell just because it's "overbought"
→ Buy pullbacks to middle band, ride the trend
Strong stocks stay overbought. Ride the trend, don't fight it.
4. Reversal Confirmation
Best for: Spotting trend changes
Price touches upper band repeatedly, fails to break higher
Then crosses below middle band = trend reversing from up to down
Middle band acts like a trendline—breaking it signals trend change.
What Band Width Tells You
Wide Bands = High Volatility
Bands far apart = prices swinging wildly
Big moves happening NOW
Expect bands to contract soon (volatility cycles)
Example: Earnings day, market crash, meme stock mania
Narrow Bands = Low Volatility (The Squeeze)
Bands close together = stock barely moving
Big move is COMING (just wait)
The market is "coiling"—energy building up for explosion
Example: Stock stuck in $5 range for weeks, bands at tightest in 6 months
Bollinger Bands Mistakes to Avoid
Selling Just Because Price Hits Upper Band
In strong uptrends, stocks can "walk" the upper band for weeks (Apple in 2020, Tesla in 2021). Overbought can stay overbought. Use trend analysis—don't fight momentum!
Buying Lower Band Touches in Downtrends
Lower band = oversold, but in downtrends it's a "falling knife." Stock can keep dropping and walk the lower band. Only buy lower band touches if the overall trend is UP.
Ignoring Volume
A breakout above/below bands on weak volume = false breakout (likely reverses). Always check volume—high volume confirms the move is real.
Using Bollinger Bands Alone
Bands show volatility, not direction. Combine with RSI (for overbought/oversold confirmation), MACD (for trend direction), and support/resistance levels.
How to Use Bollinger Bands Successfully
- •Identify the trend first: Uptrend = buy lower band touches. Downtrend = sell upper band touches
- •Watch for squeezes: Narrowest bands in 3-6 months = big move brewing, get ready
- •Confirm with volume: Breakouts need strong volume to be real
- •Combine with RSI: Lower band + RSI below 30 = strong buy signal
- •Respect band walking: Don't fight strong trends just because price is overbought
- •Middle band = trendline: Price above middle band = bullish, below = bearish
Common Questions
What are the Bollinger Band settings?
Default is 20-period moving average with 2 standard deviations. This captures 95% of price action. Don't change these unless you're very experienced—they're battle-tested.
How often do Bollinger Band signals work?
Bounces work 60-70% of the time in ranging markets. Squeezes are reliable 70-80% of the time when confirmed with volume. Band walking is 80%+ accurate in strong trends. No indicator is perfect—use stop losses!
Can I use Bollinger Bands for day trading?
Yes! Use 5-min or 15-min charts for intraday. The squeeze strategy works great for catching morning breakouts. Just remember: faster timeframes = more false signals.
What's better: Bollinger Bands or RSI?
They're different tools. Bollinger Bands = volatility and breakouts. RSI = overbought/oversold timing. Best results? Use BOTH! Lower band + RSI 25 = killer buy signal.
Key Takeaways
- •Bollinger Bands have 3 lines that measure volatility and price extremes
- •Narrow bands (squeeze) = low volatility, big move coming soon
- •Upper band = overbought zone, Lower band = oversold zone
- •Bounces work in ranging markets, breakouts work after squeezes
- •Always confirm band signals with volume, RSI, and trend direction