Learn how Bollinger Bands are calculated, what the three lines mean, and how to use breakout and mean-reversion strategies.
Bollinger Bands, invented by John Bollinger in the 1980s, consist of three lines: a middle band (20-day SMA), an upper band (middle + 2 standard deviations), and a lower band (middle - 2 standard deviations).
The bandwidth adjusts automatically with market volatility — widening during high volatility and narrowing during low volatility. Statistically, about 95% of price action falls between the upper and lower bands.
When price breaks above the upper band with increasing volume, it may signal the start of an uptrend. However, beware of false breakouts — confirm with additional indicators.
When price touches the upper band and retreats, or touches the lower band and bounces, you can trade the reversion to the middle band. This works best in ranging markets.
When Bollinger Bands contract to an extremely narrow width (the "squeeze"), it typically precedes a significant price move. Traders should prepare and wait for direction confirmation before entering.
In strong trending markets, price can "ride the band" for extended periods, making mean-reversion strategies ineffective. Always adapt to market conditions and use stop losses.
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