Technical Analysis
Bollinger Bands: Reading Volatility and Mean Reversion
Bollinger Bands wrap price in a dynamic volatility envelope. Learn to read squeezes, expansions, and band walks to time entries with precision.
Key rules
- A Bollinger Squeeze (tight bands) signals imminent volatility expansion — trade the breakout direction
- Band walks (price hugging the outer band) signal strong trend strength — do not fade them
- Mean reversion works in ranging markets; use middle band (20 SMA) as the target
- Combine with RSI: divergence at the bands improves mean reversion accuracy significantly
- Upper/lower band touches alone are not signals — context (trend vs range) determines interpretation
Bollinger Bands consist of a 20-period simple moving average (the middle band) flanked by two bands plotted two standard deviations above and below. Because standard deviation is a measure of volatility, the bands automatically widen during high-volatility periods and contract during low-volatility phases — making them one of the few indicators that adapt dynamically to market conditions.
The most important concept in Bollinger Bands is the Squeeze. When the bands compress tightly around price, it signals that volatility has contracted to an unusually low level. Low volatility always precedes high volatility — this is one of the most reliable patterns in all of financial markets. A squeeze is not a trade signal itself; it's an alert that a significant move is imminent. The direction of the breakout from the squeeze determines your trade bias.
Band Walks are a powerful but misunderstood pattern. In a strong trending market, price will 'walk' along the upper band (uptrend) or lower band (downtrend) for extended periods, with each close near or above/below the band. Many traders mistakenly sell when price touches the upper band in an uptrend. In reality, consistent closes outside the band during a trend is a sign of exceptional strength — not a reversal signal.
Mean reversion setups work best in ranging, sideways markets. When price tags the upper band and momentum oscillators show divergence, a return to the middle band is a high-probability expectation. The middle band (20 SMA) acts as the 'equilibrium' or mean that price gravitates toward. A clean setup: price reaches outer band, RSI diverges, volume fades — enter toward the middle band with the middle band as target.