Bollinger Bands (BB): How to Read It
Bollinger Bands place bands a set number of standard deviations above and below a moving average. The bands widen when volatility rises and narrow when markets get quiet.
The formula
Common settings: 20-period SMA with 2 standard deviations
How to read it
- Price near the upper band shows relative strength; near the lower band shows relative weakness.
- Narrow bands, called a squeeze, often come before larger moves.
- Wide bands reflect high volatility.
- In strong trends, price can walk along one band for some time.
- The middle band often acts as a pivot during pullbacks.
Typical signals
- A squeeze followed by a close outside the bands as a possible breakout.
- Price touching the lower band in a range as a possible bounce zone.
- Price re-entering the bands after closing outside as a possible reversal hint.
- Repeated closes along the upper band as a sign of a strong uptrend.
Pitfalls to avoid
- Touching a band is not automatically a buy or sell signal.
- Bands describe volatility, not direction.
- A squeeze tells you a move may come, but not which way.
Strategies that use it
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What is a Bollinger squeeze?
It is when the bands narrow sharply, showing low volatility that is often followed by a larger move.
Should I sell at the upper band?
Not automatically. In strong trends, price can ride the upper band for a long time.
What is %B?
%B shows where price sits relative to the bands, with 0 at the lower band and 1 at the upper band.
Works well with
Relative Strength Index
The Relative Strength Index measures the speed and size of recent gains versus losses on a scale from 0 to 100. It helps spot when a market may be stretched too far in one direction.
π§Keltner Channels
Keltner Channels draw bands around an EMA using a multiple of ATR. They create a smoother volatility envelope than Bollinger Bands and help identify trends and stretched moves.
πVolume
Volume shows how many shares, contracts or coins traded during each period. It reveals the level of participation behind a price move and helps judge whether a move has conviction.