Bollinger Bands measure volatility and help traders spot entry and exit points. They work well for swing trading setups across different market conditions.
What Are Bollinger Bands?
Bollinger Bands consist of three lines:
- Middle Band: 20-period Simple Moving Average (SMA)
- Upper Band: Middle band + (2 x standard deviation)
- Lower Band: Middle band - (2 x standard deviation)
What They Measure
- Volatility: Bands expand when volatility increases, contract when it decreases
- Relative Price: Where current price sits within the bands
- Potential Extremes: Price touching bands may be overbought/oversold
Standard Settings
- Period: 20
- Standard Deviations: 2
These settings work well for most swing trading applications.
Key Bollinger Band Concepts
The Squeeze
What It Is: Bands contract to narrow width, indicating low volatility
What It Means:
- The market is consolidating
- A large move often follows
How to Identify:
- Bands at narrowest point in 6+ months
- Price range very tight
- Use Bandwidth indicator (optional)
The Walk
What It Is: Price touches or exceeds one band over and over
Upper Band Walk:
- Strong uptrend
- Price hugging upper band
- Bullish continuation
Lower Band Walk:
- Strong downtrend
- Price hugging lower band
- Bearish continuation
Mean Reversion
What It Is: Price returning to the middle band after touching outer bands
The Concept:
- Price tends to return to the mean (middle band)
- Outer band touches are often temporary extremes
- Works best in ranging markets
Bollinger Band Trading Strategies
Strategy 1: The Squeeze Breakout
Setup:
- Identify Bollinger Band squeeze (narrow bands)
- Wait for expansion with price breakout
- Enter in direction of breakout
Entry Rules:
- Bands must be at multi-month lows
- Price breaks above/below squeeze range
- Volume confirms breakout
Stop Loss: Opposite side of squeeze range
Target: Width of squeeze projected in breakout direction
Example: Stock squeezes between $48-52 (bands narrow). Breakout above $52 with expanding bands. Buy $52.50, stop $47.50, target $56.50 (squeeze width = $4).
Strategy 2: Mean Reversion at Bands
Setup:
- Price touches or exceeds outer band
- Wait for reversal candlestick pattern
- Enter toward middle band
Entry Rules (Buying at lower band):
- Price touches or exceeds lower band
- Stock in an uptrend or range (not downtrend)
- Bullish reversal candle forms
- RSI shows oversold
Entry Rules (Selling at upper band):
- Price touches or exceeds upper band
- Stock in a downtrend or range (not uptrend)
- Bearish reversal candle forms
- RSI shows overbought
Stop Loss: Beyond the outer band
Target: Middle band (20 SMA)
Warning: Do not use mean reversion in strong trends. Price can walk the bands for extended periods.
Strategy 3: Band Walk Continuation
Setup:
- Price in strong trend, walking upper/lower band
- Wait for pullback to middle band
- Enter on bounce from middle band
Entry Rules (Long):
- Price has been walking upper band
- Pulls back to 20 SMA (middle band)
- Bounces with bullish candle
- Bands still expanding or wide
Stop Loss: Below the middle band
Target: Previous high or new upper band touch
Strategy 4: Double Bottom at Lower Band
Setup:
- Price makes low touching lower band
- Bounces to middle band
- Makes second low near lower band (higher than first)
- Breaks above middle band
Entry: Above middle band after double bottom Stop: Below second low Target: Upper band
Combining Bollinger Bands with Other Indicators
Bollinger Bands + RSI
A strong combination for mean reversion:
- Price at lower band + RSI below 30 = strong buy signal
- Price at upper band + RSI above 70 = strong sell signal
- Divergence at bands = high probability reversal
Bollinger Bands + MACD
- MACD crossover at band touch = confirmation
- MACD divergence + band touch = stronger signal
Bollinger Bands + Volume
- Band touch + volume spike = potential reversal
- Squeeze breakout + high volume = valid breakout
- Band walk + increasing volume = trend continues
Bollinger Band Width Indicator
What It Is
Measures the percentage distance between bands: Bandwidth = (Upper Band - Lower Band) / Middle Band x 100
How to Use
- Low bandwidth = squeeze, expect breakout
- High bandwidth = volatility peak, may reverse
- Historical lows in bandwidth = large move coming
Common Bollinger Band Mistakes
Mistake 1: Fading Band Touches in Trends
Problem: Shorting upper band touches in an uptrend Solution: Fade bands in ranges, ride bands in trends
Mistake 2: Ignoring the Trend
Problem: Using mean reversion in trending markets Solution: Use Band Walk strategy in trends, Mean Reversion in ranges
Mistake 3: Missing the Squeeze
Problem: Not recognizing low volatility setups Solution: Watch for narrow bands and prepare for breakout
Mistake 4: Wrong Standard Deviation
Problem: Using 1 SD bands (too tight) or 3 SD (too wide) Solution: Stick with 2 SD for swing trading
Bollinger Band Quick Reference
| Condition | What It Means | Action |
|---|---|---|
| Bands squeezing | Low volatility, big move coming | Prepare for breakout |
| Price at upper band (trend) | Strong trend | Hold or add |
| Price at upper band (range) | Overbought territory | Look for reversal |
| Price at lower band (trend) | Strong downtrend | Avoid longs |
| Price at lower band (range) | Oversold territory | Look for reversal |
| Bands expanding | Volatility increasing | Trend likely |
| Price at middle band | Equilibrium point | Watch for direction |
Tracking Bollinger Band Setups
Different setups perform differently depending on your trading style and the markets you trade. SwingFolio lets you tag trades by setup type and compare results across Bollinger Band strategies over time.
Give it a try and see which setups pay off for you.