Bollinger Bands, invented by John Bollinger in 1980, frame an asset's price with a central moving average (typically SMA 20) and two bands at ±2 standard deviations above and below.
Statistically, about 95% of prices trade within the bands. Exits are rare and signal extreme volatility.
Classic readings:
- Tight bands (squeeze): low volatility, compressed market → often followed by explosive move (breakout). Strategy: wait for band break to enter.
- Wide bands: high volatility, ongoing trend
- Upper band touch: short-term overbought, possible pullback to mean (but in strong trends, price can "walk the band" for days)
- Lower band touch: oversold, possible bounce
Powerful combinations:
- Bollinger + RSI: lower band touch + RSI < 30 = high-probability bounce setup
- Bollinger Bandwidth: (upper - lower) / mean. When this value hits a 6-month low → imminent squeeze → prepare for breakout
Common mistakes: using bands as automatic stops (false signals in trends) or shorting whenever price touches the upper band (suicidal in bull markets). Always combine with other signals.