The two bands on your chart have drawn closer together every day for a fortnight. That narrowing is the whole signal. It says the last 20 closes have varied less than usual, and the Bollinger squeeze breakout is a set of rules for what to do when the price finally leaves that range.
What the Bollinger squeeze is
John Bollinger's bands sit at a moving average with an upper and lower curve set a number of standard deviations away. The familiar settings are a 20-period average with the curves two standard deviations out. Bollinger's own rule list calls them "just that, defaults" and adds that "The actual parameters needed for any given market/task may be different" (Bollinger Bands Rules).
The squeeze is measured with BandWidth, the indicator built from the distance between the two bands. Bollinger states what it is for: "BandWidth tells us how wide the Bollinger Bands are. The raw width is normalized using the middle band" and "Its most popular use is to identify 'The Squeeze'".
So a squeeze is a BandWidth reading at the low end of its own recent history. This article uses the lowest BandWidth of the past 20 sessions, which on a daily chart is about a month of trading.
What the squeeze does not promise
The setup rests on an assumption: that a period of unusually narrow range is followed by a wider one. That assumption is why the trade exists, and it is not a law.
Two of Bollinger's own rules are worth reading before you size anything.
On the statistics: "Make no statistical assumptions based on the use of the standard deviation calculation in the construction of the bands. The distribution of security prices is non-normal and the typical sample size in most deployments of Bollinger Bands is too small for statistical significance".
On what the tool delivers: "Bollinger Bands do not provide continuous advice; rather they help identify setups where the odds may be in your favor".
A squeeze tells you that volatility has been low. It does not tell you which way the exit comes, or that it comes at all.
Entry rules for the Bollinger squeeze breakout
Three conditions on the same daily close, plus one check on the market around it. They are this article's parameters.
Condition 1: BandWidth at a 20-session low. This identifies the squeeze rather than eyeballing the chart for narrow bands.
Condition 2: a close above the upper band. Not a touch. Bollinger is direct about the difference: "Tags of the bands are just that, tags not signals. A tag of the upper Bollinger Band is NOT in-and-of-itself a sell signal." His rule 8 is what this entry rests on: "Closes outside the Bollinger Bands are initially continuation signals, not reversal signals. (This has been the basis for many successful volatility breakout systems.)"
Condition 3: volume at least 50% above its 20-day average. A threshold you choose, describing turnover on the breakout session and nothing else.
Condition 4: market context. Check the index the stock belongs to, on whichever exchange it trades. A breakout taken while that index is falling is the same chart pattern against a different backdrop, and it is a different trade from the one these rules were written for.
Exits: the middle band and the stop
Two exits again, and the first one fires on the same average that draws the bands.
Exit 1: a close below the middle band. The middle band is the 20-period moving average, so this exit fires when the price closes back inside the envelope on the average that drew it.
Bollinger adds a caution that applies directly here. His rule 10 says the average used as the middle band should describe the intermediate-term trend, rather than being the one selected to produce crossovers. If you are using the middle band as your exit trigger, you are using it for something he suggests it is not chosen for. Either accept that and record the results, or pick a separate exit average and say so.
He also notes that "In trending markets price can, and does, walk up the upper Bollinger Band and down the lower Bollinger Band". A trade that keeps closing above the upper band is doing the thing the entry rule was betting on, and the middle band exit will leave it alone until the move ends.
Exit 2: the stop, 4% below entry. Fixed, set before entry, and not moved down afterwards.
Risk and position size arithmetic
Risk 1.5% of a $50,000 account and the loss at the stop is $750. With a 4% stop, the position that risks $750 is $750 / 0.04 = $18,750.
Read that as a share of the account: $18,750 is 37.5% of $50,000, in one stock, on a setup whose premise is that volatility is about to rise. The small dollar risk and the large capital commitment are both true at once, and the stop is what separates them. A gap through the stop is charged against the position.
The target is 3R. With a 4% stop that is a 12% move: 3 x 4% = 12%. Breakeven win rate at 3:1 is 1 / (1 + 3) = 25%.
A hypothetical worked example
No real company here. The prices exist to make the arithmetic checkable.
A stock has traded in a narrowing range for five weeks, and BandWidth prints its lowest reading in 20 sessions. On Thursday it closes at $48.00, above the upper band, on volume 80% above its 20-day average.
- Entry: $48.00. Stop 4% below: $46.08. Risk per share: $1.92.
- Size: $750 / $1.92 = 390 shares, costing 390 x $48.00 = $18,720.
- Target at 3R: $48.00 + 3 x $1.92 = $53.76, which is 12% above the entry.
Two ways this ends. The price runs to $53.76 and the target closes it at +3R. Or it reaches $53.00, turns, and closes below the middle band at $50.20: that is $50.20 - $48.00 = $2.20 per share, and $2.20 / $1.92 = 1.1R.
The second outcome is the common shape of a rule-based exit. You keep part of the move and you keep the decision out of the moment.
Where squeeze breakouts go wrong
Chasing the session you missed. Enter two days late at 8% above the breakout close and the stop distance has widened while the target has not. The reward to risk you planned no longer exists.
Trading the narrow bands alone. A squeeze with no close outside the band is a squeeze, not a trade. Condition 2 is what separates them.
Treating a failed breakout as a reversal trade. A close back inside the bands is the exit rule firing. Turning the position around is a different strategy, and it needs its own written rules.
Trading it in a range-bound market. When the wider market is going sideways, a close above the upper band can reverse within days and trigger the same setup in the other direction. The whipsaw costs you the stop each time, so a squeeze inside a directionless market is the case for taking no trade.
Holding through a scheduled result. Ranges often narrow ahead of an announcement, so squeeze entries can sit right in front of one. Check the calendar before entry and decide in advance, because a gap the next morning will not consult your stop.
Running the Bollinger squeeze breakout in Swingfolio
The Strategy Library ships a template called "Bollinger Squeeze Breakout", tagged Volatility and Advanced, with 3 entry rules and 2 exit rules. Hover a row and press Preview to see them numbered under Entry Rules (3) and Exit Rules (2), with a Risk Management block reading Stop Loss 4%, Target R-Multiple 3R and Position Size 1.5%. Import copies it into your strategies, where every one of those numbers becomes editable.
Swingfolio has no tag field for the setup you traded. What you do instead is assign the trade to the strategy: the trade form has a Strategy field, and picking your imported squeeze strategy there is what makes the app count the trade under it.
The trade form also prints the risk as you type. Four figures appear as Exp. Risk, Exp. Reward, R:R Ratio written as "1 : 3.00", and Port. Risk as a percentage of your portfolio value, with a warning line reading "Risk exceeds 5% of portfolio value" above 5%. If you want the share count worked out before you get there, the public position size calculator takes Entry Price, Stop Loss Price, Account Value and Risk Percentage and prints it.
Once you have a dozen of these logged, the strategy's own page carries the answer to the question this setup raises. Its Strategy Comparison table shows Total P/L, Win Rate, Avg. R-Multiple and Trade Count, and the R-Multiple Distribution under it shows the shape: a 4% stop that is too tight for the instrument produces a stack of small losses, whatever the win rate says.
Find one chart where BandWidth is at a 20-session low, write the four conditions and the two exits against it, then wait for the close rather than the touch. Start the 30-day trial if you want the trades counted under the strategy from the first one.