Bollinger Bands
Volatility bands indicator that creates dynamic support and resistance levels around price, essential for mean reversion and breakout strategies
Technical Overview
Bollinger Bands is a volatility indicator developed by John Bollinger that creates dynamic price channels using a moving average and standard deviation bands. The bands expand and contract based on market volatility, providing adaptive support and resistance levels.
Key Insight: Bollinger Bands combine trend-following (middle band) with volatility measurement (band width) to identify both mean reversion opportunities and potential breakout conditions. When bands are narrow, expect increased volatility; when wide, expect consolidation.
How Bollinger Bands Work
What Bollinger Bands Actually Measure
Think of Bollinger Bands as “dynamic price boundaries” that answer: “Where should price normally trade based on recent volatility?”
Step 1: Calculate Moving Average
Creates the middle line (typically 20-period SMA)
Step 2: Measure Volatility
Calculates standard deviation of recent price movements
Step 3: Create Bands
Upper/Lower bands at 2 standard deviations from middle
Understanding Band Conditions
Narrow bands, breakout likely coming
Regular volatility, trend continuation
Wide bands, strong trending move
Key Bollinger Band Components
Middle Band (SMA)
20-period Simple Moving Average that acts as the trend baseline and dynamic support/resistance level
Upper Band
Middle band plus 2 standard deviations, representing statistically high price levels and potential resistance
Lower Band
Middle band minus 2 standard deviations, representing statistically low price levels and potential support
Band Width
Distance between upper and lower bands, indicating current market volatility and potential for breakouts
Strategy Integration
5-Day Predictions
How Bollinger Bands Guide Short-Term Trades:
- Mean Reversion Signals: Price touching bands provides probability-based entry points for reversal trades
- Breakout Confirmation: Price closing outside bands with volume confirms genuine breakout moves
- Volatility Context: Band width helps determine position sizing and stop-loss distances
- Trend Validation: Middle band acts as dynamic support/resistance for trend continuation
- Risk Management: Band violations signal potential trend changes requiring position adjustments
Real Impact: Bollinger Bands provide probability-based entry/exit signals with built-in volatility adjustment
1-Year Predictions
How Bollinger Bands Enhance Long-Term Strategy:
- Volatility Regime Detection: Band width patterns help identify market stress periods and opportunities
- Long-Term Support/Resistance: Monthly Bollinger Bands provide strategic entry zones for year-long positions
- Market Timing: Band squeeze patterns often precede major market moves over months
- Portfolio Rebalancing: Extreme band readings trigger strategic allocation adjustments
- Risk Scaling: Band width relative to historical norms guides position sizing for long-term holds
Real Impact: Bollinger Bands help time major strategic moves and identify market regime changes
Bollinger Band Trading Applications
Why Use Bollinger Bands in Trading?
- Dynamic support and resistance levels that adapt to volatility
- Mean reversion signals with statistical probability backing
- Breakout detection with built-in volatility context
- Volatility measurement for strategy and risk management
- Trend strength assessment through band behavior
- Universal application across all markets and timeframes
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