Bollinger Bands
Lesson 5 of 126 min5 exercises
Learn · 1/4
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.
Learn · 2/4
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!
Example
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
Learn · 3/4
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
Tip
SUTOK flags when price breaks above/below Bollinger Bands as potential mean reversion signals.
Learn · 4/4
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
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