Bollinger Bands are a volatility indicator developed by John Bollinger. They consist of a middle band (SMA) with upper and lower bands that expand and contract based on market volatility.
How Bollinger Bands Work
| Component | Calculation | Purpose |
|---|---|---|
| Middle band | 20-period SMA | Trend direction |
| Upper band | Middle + (2 × standard deviation) | Resistance / overbought |
| Lower band | Middle – (2 × standard deviation) | Support / oversold |
Standard deviation measures volatility. When volatility increases, bands widen. When volatility decreases, bands contract.
Key Concepts
Squeeze: When the bands contract tightly, it signals low volatility and suggests a big move is coming. The direction of the breakout is unknown — wait for price to confirm.
Walk the bands: In strong trends, price can “walk” along the upper or lower band. This is not necessarily a reversal signal — it shows trend strength.
Band touch: Touching the upper band is not automatically a sell signal. In an uptrend, price can touch the upper band repeatedly.
Three Proven Strategies
Strategy 1: The Squeeze Breakout
- Identify a period where bands are unusually narrow
- Wait for a candle to close outside the bands
- Enter in the direction of the breakout
- Place stop at the opposite band
Best for: Trending markets after consolidation.
Strategy 2: Mean Reversion
- When price touches the lower band, look for a buy
- When price touches the upper band, look for a sell
- Only trade in the direction of the larger trend
- Use RSI divergence for confirmation
Best for: Ranging markets.
Strategy 3: The Trend Ride
- In an uptrend, buy when price pulls back to the middle band (SMA)
- In a downtrend, sell when price rallies to the middle band
- Exit when price touches the opposite band
- Trailing stop below the middle band
Best for: Strong trending markets.
Settings for Crypto
| Market | Period | Standard Deviations |
|---|---|---|
| Crypto (volatile) | 20 | 2.5–3 |
| Stocks (moderate) | 20 | 2 |
| Forex | 20 | 2 |
Crypto’s higher volatility means increasing the standard deviation to 2.5 or 3 reduces false signals.
Common Mistakes
- Selling at the upper band in an uptrend — The trend is your friend
- Buying at the lower band in a downtrend — Catching falling knives
- Ignoring the squeeze — Low volatility often precedes big moves
- Using only one timeframe — Check higher timeframe bands for context
Combining with Other Indicators
- + RSI — RSI > 70 with upper band touch = stronger overbought signal
- + Volume — Breakout with expanding volume = more reliable
- + MACD — MACD crossing confirm direction on squeeze breakouts
Bottom Line
Bollinger Bands are excellent for identifying volatility cycles and potential entries. Use the squeeze for anticipating breakouts, mean reversion for ranging markets, and the middle band trend ride for trending markets. Adjust the standard deviation to 2.5 for crypto to reduce noise.