Bollinger Bands

Bollinger Bands are a simple measure of volatility in the market. When the market is quiet the bands contract and when the market has momentum the bands expand.

The bands show us how much price movement there has been away from the moving average as below:

Ok, close your eyes if maths wasn’t your strong point because even though we aren’t going to bore you with the actual calculations, it’s good to know what the three lines represent.

Middle line: Simple moving average, with the default period usually set at 20.

Outside bands: Deviations (or variances) from this moving average line. The default setting is usually 2 ie: 2 standard deviations from the moving average.

Note: Just to confuse Newbie Ninjas further some charts will only show the two lines of the band not the moving average line.

Phew, maths bit over .. you just want to know how to use this thing right??

Trading with Bollinger Bands

There are two main ways that traders use Bollinger bands: either a Bollinger Squeeze or a Bollinger Bounce.

Bollinger Squeeze:

Whether it’s the toothpaste tube, garden hose or even those pants you fitted last summer, if you squeeze something long enough at some point it’s going to break out one way or another.

And the Bollinger Squeeze is just that, a sudden volatile break up or down after a period of price consolidation.

In the example below price was stuck in a tight range for about 2 hours. Finally a bearish candle closed outside of the lower band then price took an immediate drop .. sweet pips for the taking!

Bollinger Bounce:

Bollinger bands, especially at higher timeframes, tend to act as mini support and resistance lines. So when price reaches the edge of the bands it tends to bounce back into the middle. The middle band (which is the simple moving average) can also provide support or resistance.

Bounces work best in a ranging market where price will be bouncing between the support and resistance areas.