How Bollinger Bands Work
Bollinger Bands consist of three lines: a middle band (typically a 20-period simple moving average), an upper band (middle band plus two standard deviations), and a lower band (middle band minus two standard deviations).
The bands expand when volatility increases and contract when volatility decreases. This visual representation of volatility conditions is immediately useful for prediction strategy selection.
Statistically, approximately 95% of price action should occur within the bands. When price touches or exceeds a band, it represents a statistically extreme move that may be unsustainable.
The Bollinger Squeeze
When Bollinger Bands contract to unusually narrow widths, they signal a period of compressed volatility — the "squeeze." Compressed volatility periods tend to precede explosive directional moves.
The squeeze itself does not tell you which direction the breakout will go. It tells you that a significant move is likely imminent and that you should be prepared to act when direction becomes clear.
Many traders use the squeeze as a preparation signal: when bands are narrow, shift to higher alertness, pre-identify key levels, and be ready to predict the direction once the first decisive candle breaks out of the squeeze.
Band Touches and Mean Reversion
When price touches the upper Bollinger Band, the market is in the upper extreme of its recent range. When it touches the lower band, the lower extreme. These touches create potential mean-reversion opportunities.
In range-bound markets, band touches are excellent mean-reversion setups: predict bearish when price touches the upper band with a rejection candle, and bullish when price touches the lower band with a reversal candle.
In trending markets, band touches behave differently. During a strong uptrend, price may "walk the band" — riding along the upper band for extended periods. Treating these touches as mean-reversion signals in a strong trend leads to consistent losses.
Bollinger Bands and Regime Identification
Bollinger Bands provide an instant visual regime assessment. Wide bands with price trending along one edge indicate a trending regime. Narrow bands with price oscillating between them indicate a range regime.
The transition from narrow to wide bands often marks a regime change from range to trend. This transition is one of the most informative signals Bollinger Bands provide.
Use the band width as a pre-session regime filter: are the bands currently narrow (expect a breakout soon), normal (standard strategy conditions), or wide (trending, ride the momentum)?
Practical Bollinger Band Predictions
For range strategies: when price touches the lower band and a bullish candle forms, predict the next candle as bullish (mean-reversion bet). When price touches upper and a bearish candle forms, predict bearish.
For trend strategies: when price breaks out of a squeeze in a clear direction with volume, predict continuation in that direction for the subsequent candles.
Combine Bollinger Band readings with your existing candle analysis rather than treating them as a standalone system. They are most useful as a volatility context layer.