Bollinger bands are another elaboration on the standard moving average approach.

They start with a simple moving average, often 20-period – this is the middle line.
Two other lines, upper and lower, are then calculated using +-2 standard deviations in the price over the same period.

[If you remember standard deviation from school math, no problem - if you don't, again, no problem, the charting software should be doing it all for you, but you might want to check here for what's going on.]

So the chart will show 3 lines, the Bollinger bands – and essentially they’re a sign of the volatility of a market.

When the market is relatively quiet, the bands contract towards each other.
When the market is loud, the bands expand away from other.
We’ve used volatility and quiet/loud here – there’s other adjectives to give a picture of what’s going on, tension, action, you’ll read different explanations and everybody has their own idea of what’s being meant.

Bollinger Squeeze

When the bands contract together, it a signal of possible breakout, expect action, because something’s got to give… If the trend goes above the upper band, most likely it will carry on up, and going through the lower, most likely carry on down. The bands have squeezed the price out, one way or another.

The Bollinger Bounce

All other things being equal, (and especially if there is no clear trend showing in the market) the price tends to drift back to the middle Bollinger band – the Bollinger bounce.

So here, the upper and lower Bollinger Bands act as levels of support and resistance.

The longer the time frame you are in, the stronger these bands are. Many traders have developed systems that thrive on these bounces, and this strategy is best used when the market is ranging and there is no clear trend.

There’s a set of more-or-less hard-and-fast rules associated with Bollinger bands – signals of when to long and short positions – but for now, looking back at some charts and picking possible Bollinger bounces and squeezes will probably serve you better than getting heavily stuck into the system to the exclusion of other indicators.

Bollinger Bands – the Math
Bollinger Bands were popularized by John Bollinger in the early 1980s – they’re not named for what you might be drinking if all your trades come off…

Next is 10. Momentum Indicators →