Lesson 6 of 7 · Indicators
Bollinger Bands
Bollinger Bands mark unusual price distance.
Bollinger Bands are a 20-period SMA with bands two standard deviations above and below it. When volatility drops, the bands contract into a squeeze. When it rises, they expand. Most closes, roughly nine in ten, land inside the bands, so a close outside is unusual.
Squeeze, then expansion.
The BANDS (20, 2) contract during the SQUEEZE as volatility drops. Then they widen into EXPANSION as price moves strongly. The bands don't say which direction the move will take.
A close at the upper band is not a sell signal.
In a strong trend, price can walk the upper band for many candles. That just means momentum is high. A short signal requires more evidence: a reversal candle, RSI divergence, or a failure at a prior high. The band alone is not enough.
Bollinger Bands compress to their tightest point in six months. What typically follows?
Show the answer
B. An increase in volatility and a directional move. A squeeze reflects unusually low volatility. Volatility cycles, so tight bands often precede expansion. The direction is not given by the bands alone.