Bollinger Bands
A technical analysis tool that measures market volatility and identifies potential overbought and oversold conditions.
Overview
Bollinger Bands were developed by John Bollinger in the 1980s. They consist of three lines:
- Upper Band: Middle Band + (2 × Standard Deviation) — Shows the upper volatility boundary
- Middle Band: 20-period Simple Moving Average (SMA) — The baseline trend
- Lower Band: Middle Band - (2 × Standard Deviation) — Shows the lower volatility boundary
Mathematical Formula
Step 1: Calculate the Middle Band (SMA)
Step 2: Calculate Standard Deviation
Standard deviation measures how spread out prices are from the average.
Step 3: Calculate Upper and Lower Bands
Practical Example: AAPL Stock
Given: 20 days of AAPL closing prices
Step 1: Calculate Middle Band
Step 2: Calculate Standard Deviation
σ = √(193.95 / 20) = 3.11
Step 3: Calculate Bands
Parameters Explained
Period Setting (Default: 20)
- Shorter (10-15): More sensitive, more signals, more false signals
- Longer (30-50): Smoother, fewer signals, more reliable
When to adjust:
- • Day trading → 10-15 period
- • Swing trading → 20 period (default)
- • Position trading → 30-50 period
Standard Deviations (Default: 2)
- 1.5 σ: Narrower bands, more signals
- 2.0 σ: Default, balanced approach (95% of price action)
- 2.5 σ: Wider bands, fewer signals
Trading Signals
1. Bollinger Bounce
Strategy: Price bounces off the bands
Setup: Price touches lower band in uptrend
Entry: Buy when price bounces off lower band
Exit: Sell when price reaches middle or upper band
Best for: Ranging markets
2. Bollinger Squeeze
Strategy: Low volatility precedes high volatility
Setup: Bands narrow significantly (lowest in 6 months)
Entry: Wait for breakout above/below bands
Exit: When bands start widening significantly
Best for: Breakout trading
3. Band Walking
Strategy: Strong trends "walk" along a band
Setup: Price consistently touches upper band
Entry: Buy on pullbacks to middle band
Exit: When price breaks below middle band
Best for: Strong trend confirmation
4. Middle Band Crossover
Strategy: Middle band acts as dynamic support/resistance
Setup: Price crosses middle band (20 SMA)
Entry: Buy when price crosses above middle band with volume
Exit: When price crosses back below middle band
Best for: Trend following
Common Mistakes
Treating Bands as Fixed Support/Resistance
Problem: Bands are dynamic and change with volatility
Solution: Use bands to gauge relative price levels, not absolute levels
Trading Every Touch
Problem: Not every band touch is a reversal signal
Solution: Confirm with other indicators (RSI, volume, candlestick patterns)
Ignoring the Trend
Problem: Going against the trend when price "walks" a band
Solution: In strong trends, price can stay overbought/oversold for extended periods
Using Same Settings for All Assets
Problem: Different assets have different volatility profiles
Solution: Backtest and optimize parameters for each asset
Best Practices
Confirmation
Always confirm signals with:
- • Volume analysis
- • RSI divergences
- • Support/resistance levels
- • Trend analysis
Risk Management
- • Stop loss below recent swing low
- • Position size based on volatility
- • Risk 1-2% per trade
- • Use ATR for stop placement
Market Conditions
Ranging Markets
Bollinger Bounce works best • Fade the extremes
Trending Markets
Band Walking is common • Trade pullbacks to middle band
Timeframes
- • Intraday: 10-20 period
- • Daily: 20 period (default)
- • Weekly: 20-30 period
- • Multiple timeframes for confluence
Summary
Bollinger Bands are a versatile tool for measuring volatility and identifying overbought/oversold conditions. They work best when:
- • Combined with other indicators
- • Adjusted for asset volatility
- • Used with proper risk management
- • Confirmed by volume and trend analysis
Start with the default settings (20, 2) and adjust based on backtesting results for your specific trading style and assets.