Bollinger Bands are a volatility indicator created by John Bollinger in the 1980s. They consist of three lines that expand and contract based on market volatility, helping traders identify overbought/oversold conditions and potential breakouts.
Bollinger Bands Components
| Band | Calculation | Default |
|---|---|---|
| Middle Band | Simple Moving Average | 20-period SMA |
| Upper Band | Middle + (2 × Std Dev) | ~95% of price action |
| Lower Band | Middle - (2 × Std Dev) | ~95% of price action |
Key Concept: About 95% of price action occurs within the bands. When price moves outside, it's statistically significant.
Reading Bollinger Bands
Band Width = Volatility
- Wide bands: High volatility — big moves happening
- Narrow bands (squeeze): Low volatility — breakout coming
Price at Bands
- Price at upper band: Potentially overbought
- Price at lower band: Potentially oversold
- Price at middle band: Mean/equilibrium zone
Trading Strategies
Strategy 1: Mean Reversion
Prices tend to return to the middle band:
- Buy: When price touches lower band and shows reversal
- Sell: When price touches upper band and shows reversal
- Target: Middle band (SMA 20)
Don't Trade Blindly: Just because price touches a band doesn't mean it will reverse. In strong trends, price can "walk the bands" — staying at the upper/lower band for extended periods.
Strategy 2: Bollinger Squeeze
When bands narrow significantly, a big move is coming:
- Wait for bands to become very narrow (squeeze)
- Watch for price to break out of the range
- Enter in the direction of the breakout
Strategy 3: Walking the Bands
In strong trends:
- Uptrend: Price hugs the upper band → Don't short
- Downtrend: Price hugs the lower band → Don't buy
Pro Tip: Combine Bollinger Bands with RSI. Buy when price is at the lower band AND RSI is below 30 for stronger signals.
Bollinger Band Settings
| Setting | Period | Std Dev | Use Case |
|---|---|---|---|
| Standard | 20 | 2 | Most situations |
| Short-term | 10 | 1.5 | Day trading |
| Long-term | 50 | 2.5 | Swing trading |
Using Bollinger Bands in VivaTrades
Create Bollinger Band strategies:
- Oversold entry: Close < Lower Bollinger Band
- Mean reversion exit: Close > Middle Band
- With RSI filter: Close < Lower BB AND RSI < 30