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Bollinger Bands Explained
Bollinger Bands create dynamic price channels using a moving average and standard deviation bands. They expand and contract with volatility and help identify mean reversion and breakout conditions. Learn how we use them in the Macro Model and Timing Model.
What it does
Bollinger Bands combine trend-following (middle band) with volatility measurement (band width). When bands are narrow (squeeze), expect increased volatility or breakout; when wide, expect consolidation. About 95% of price action typically stays within the bands (2 standard deviations); moves outside are statistically significant. Conditions: Band squeeze = low volatility, breakout likely; Normal width = standard conditions; Band expansion = high volatility, strong move.
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Generate 12-month market outlooks using Bollinger Bands and other technical and macro factors. Classify market regimes.
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Use Bollinger Bands for mean reversion and breakout signals. Combine with other indicators for 5-day predictions.
Run Timing ModelHow it works
Middle band = 20-period Simple Moving Average. Upper band = SMA + (2 × standard deviation). Lower band = SMA − (2 × standard deviation). Band width (distance between upper and lower) indicates volatility; narrow bands (squeeze) often precede breakouts.
Key components
- Middle band (SMA): 20-period SMA—trend baseline and dynamic support/resistance
- Upper band: Middle + 2 standard deviations—statistically high price, potential resistance
- Lower band: Middle − 2 standard deviations—statistically low price, potential support
- Band width: Distance between bands—volatility and breakout potential
How we use it
For short-term (5-day): mean reversion at band touches, breakout confirmation when price closes outside bands with volume, band width for position sizing and stop-loss, middle band as dynamic support/resistance. For long-term (12-month): band width for volatility regime and stress periods, band squeeze patterns for major moves, and extreme band readings for strategic allocation adjustments.
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Sign UpFrequently Asked Questions
What are Bollinger Bands?
Bollinger Bands are volatility bands around a 20-period moving average, with upper and lower bands at 2 standard deviations. They expand and contract with volatility. Price touching the bands can signal mean reversion; closing outside the bands can signal breakouts. Narrow bands (squeeze) often precede big moves.
How do you use Bollinger Bands in the Macro Model and Timing Model?
We use them for mean reversion and breakout signals in the short term, and for volatility regime detection and strategic timing in the long term. Band width and squeeze patterns help with position sizing and allocation decisions.
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