Bollinger Bands
A volatility indicator consisting of a middle band (SMA) and two outer bands set at standard deviations above and below.
Plain English Explanation
Bollinger Bands are like elastic boundaries around price. They expand when volatility increases and contract when things calm down.
**The three lines:**
- **Middle Band** = 20-period Simple Moving Average (the trend)
- **Upper Band** = Middle + 2 standard deviations (resistance zone)
- **Lower Band** = Middle - 2 standard deviations (support zone)
**Key concepts:**
1. **The Squeeze:** When bands get really tight, a big move is coming (we just don't know which direction)
2. **Band Walks:** In strong trends, price can "walk" along the upper or lower band
3. **Mean Reversion:** Price tends to return to the middle band
**Statistically:** Price should stay within the bands about 95% of the time. When price touches or exceeds a band, it's an "extreme" move.
How It Works (Technical)
The middle band is a 20-period SMA. The upper and lower bands are placed 2 standard deviations away from the middle. Standard deviation measures volatility, so bands widen in volatile markets and narrow in calm markets.
When It Works Best
- Range-bound markets (fade the bands)
- Identifying volatility expansion/contraction
- Mean reversion strategies
- Finding entry points in trends (touches middle band)
- All timeframes when properly adjusted
When It Fails
- Strong trending markets (price walks the band)
- After news events (bands expand too late)
- Very short timeframes (too much noise)
- When used as standalone buy/sell signals
- Markets with irregular volatility patterns
Common Beginner Mistakes
- 1Buying every touch of lower band without confirmation
- 2Selling every touch of upper band in uptrends
- 3Ignoring the squeeze (low volatility before big moves)
- 4Not adjusting period/deviation for different assets
- 5Treating bands as guaranteed support/resistance
Pro Tips
- Look for candle patterns at the bands for confirmation
- Narrow bands = expect a breakout soon, but wait for direction
- In uptrends, buy bounces off the middle band
- Use %B indicator to quantify position within bands
- Combine with volume to confirm breakouts from squeezes
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