Understanding Indicators
Bollinger Bands
Measuring Volatility
Bollinger Bands measure volatility and provide relative definitions of high and low prices. They expand during volatile periods and contract during calm periods.
Components
Middle Band: 20-period SMA
Upper Band: 20 SMA + (2 × Standard Deviation)
Lower Band: 20 SMA - (2 × Standard Deviation)
Statistically, 95% of price action should occur within the bands.
Upper Band: 20 SMA + (2 × Standard Deviation)
Lower Band: 20 SMA - (2 × Standard Deviation)
Statistically, 95% of price action should occur within the bands.
Trading Bollinger Bands
Mean Reversion (Ranging Markets):
- Price touches upper band → Likely to pull back
- Price touches lower band → Likely to bounce
Trend Following (Trending Markets):
- Price "riding" upper band = Strong uptrend
- Price "riding" lower band = Strong downtrend
- Don't fade the trend!
- Price touches upper band → Likely to pull back
- Price touches lower band → Likely to bounce
Trend Following (Trending Markets):
- Price "riding" upper band = Strong uptrend
- Price "riding" lower band = Strong downtrend
- Don't fade the trend!
GME in a range: - Upper Band: $26 - Lower Band: $22 - Price touches $26 → Short/take profits - Price touches $22 → Buy/cover shorts
Mean reversion works best in ranges
The Squeeze
Bollinger Squeeze:
- Bands narrow significantly
- Indicates low volatility
- Often precedes a major move
- Direction unknown - wait for breakout confirmation
- Bands narrow significantly
- Indicates low volatility
- Often precedes a major move
- Direction unknown - wait for breakout confirmation
SUTOK flags when price breaks above/below Bollinger Bands as potential mean reversion signals.
Key Takeaways
- Bands expand with volatility, contract in calm markets
- 95% of price action stays within the bands
- Touch upper band in range = potential short; lower = potential long
- Squeeze (narrow bands) often precedes big moves