There are a handful of technical indicators out there, and one of them is called Bollinger bands. It got its name from John Bollinger, its developer. Bollinger bands are technical indicators that measure the market’s volatility. It also tells us whether the market condition is overbought or oversold. In simple terms, the Bollinger bands indicate whether the market is loud or quiet. These are also chart overlay indicators where they are displayed over the price.
Quiet or loud?
The market is said to be loud when the bands are contracting. It is said to be quiet when the bands are expanding. Furthermore, the bands are close together when the prices are quiet. The bands move further away from each other when the price moves up.
Bollinger bands and volatility
The Bollinger bands measure the market’s volatility through the upper and lower bands. And when we say volatility, we mean the price variation over some time. And since they measure volatility, these bands adjust on their own as the market conditions change.
Simply, Bollinger bands.
When we plot Bollinger bands, we put three lines in there: the upper band, middle line, and the lower band. In these three lines, the middle line is an SMA known as the simple moving averages. Usually, a charting software’s default is 20 periods. Some traders are satisfied with 20 periods, and some like to experiment. They put various moving average lengths, especially if they already know how Bollinger bands work.
The other two lines, which are the upper and lower bands, stand for two standard deviations on top and below the middle line. If you are not aware of what standard deviations are, they are simply spread-out number measurements.
The Bollinger bounce
Bollinger bounce is simply telling us that the price most likely returns to the middle of the bands, hence the term Bollinger bounce. They bounce because the Bollinger bands behave like dynamic support and resistance levels. The longer the given time frame, the stronger the bands. Some traders might love to argue that this strategy is very convenient to use during a ranging market, and there are no clear trends. Again, only use this strategy when there are no clear trends and be alert about the bandwidth. It might not be appropriate to use the Bollinger bounce when the bands expand since the price movement is not ranging — it is in a trend. If you are curious about Bollinger bands in a trending market, read the next topic!
The Bollinger squeeze
As the name suggests, the Bollinger bands squeeze in a Bollinger squeeze. Usually, it means that a breakout is about to happen. Usually, the move proceeds to go up if the candles break out above the top band. The price proceeds to go down if the candles break out under the bottom band. Bollinger squeeze strategy is ideal for catching a move at the earliest.
A little summary
Bollinger bands measure volatility. The upper and lower band represent two standard deviations, and the middle line is the moving average. Only use the Bollinger bounce strategy when the price movement is ranging and are no clear trends. On the other hand, the strategy used when there are trends is the Bollinger squeeze.