A volatility indicator that shows in advance where the market is gearing up for a big move. Here is how the bands are built, what a squeeze is, and why touching a band is not a reversal signal.
A 20-candle average and two bands two standard deviations above and below it.
What it shows
Volatility: the bands widen when the market moves and narrow when it goes quiet.
Strength
A squeeze shows in advance that the market is building up energy for a strong move.
Weak spot
It doesn't tell you the breakout direction and gives false "reversal" signals in a trend.
How the bands are built
In the middle is a 20-candle moving average. The upper and lower bands sit two standard deviations away — a measure of how widely price is scattered around the average. Statistically, most closes land inside the bands.
When the market moves sharply, the deviation grows and the bands spread apart. When it calms down, they come together.
Squeeze and breakout
Bollinger's core idea: periods of low volatility are followed by periods of high volatility. When the bands narrow to their tightest in a long time, the market is storing energy, and the next move is often a strong one.
The bands tighten into a narrow corridor, then price closes above the upper band and the move begins. Illustrative data.
How to use it
01
Find the squeeze
The bands are clearly narrower than in recent weeks and price trades in a tight range.
02
Mark the range edges
The high and low of the squeeze period are your breakout levels.
03
Wait for a close beyond the band
A candle closes outside the range and outside the band, with rising volume.
04
Stop in the middle of the range
If price falls back inside the squeeze, the breakout was false.
05
Trail along the average
In a new trend price "rides" the band, and pullbacks to the average are places to add.
Touching the upper band doesn't mean "expensive, sell". In a strong trend price can walk along the band for many candles. Reversal trades off the bands only work in a range.
Common mistakes
Selling every touch of the upper band
In a trend those are trades against the move. A band measures volatility; it's not a resistance level.
Guessing the direction of the breakout
A squeeze says "a move is coming", not where. Wait for the breakout.
Entering on the first candle outside the band
False breakouts are common. You need a close, ideally with rising volume.
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