What are Bollinger Bands?

Bollinger Bands are a volatility-based technical indicator consisting of a middle moving average and two outer bands. The outer bands expand or contract according to the asset’s price volatility. The basic structure is as follows:

• Middle Band: Usually a 20-period SMA (Simple Moving Average).
• Upper Band: Middle band + 2 standard deviations.
• Lower Band: Middle band − 2 standard deviations.

As pe general market understanding, when volatility increases, the bands generally “widen”. In contrast, when volatility decreases, they may “narrow”. In this way, the bands may provide context about price volatility and its position relative to recent price behavior.

How to Develop a Bollinger Bands Trading Strategy?

To develop a Bollinger Bands trading strategy, several traders examine the following:

• How price behaves near the upper and lower bands
• Changes in band width, and 
• Analysis of periods when the bands become unusually narrow.

Note that a narrow band indicates relatively low recent volatility and is sometimes called a “squeeze”. Specifically, traders monitor such periods to check for any subsequent increase in volatility. However, note that the indicator itself does not determine the direction of the eventual price movement. A price touching the upper or lower band does not automatically mean that a reversal will occur.

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