Bollinger Bands: Trading Volatility
Uses Bollinger Bands to identify overbought/oversold conditions and volatility-based trading opportunities.
What are Bollinger Bands?
Bollinger Bands are a volatility indicator consisting of a middle band (usually a 20-period moving average) with an upper and lower band set at 2 standard deviations away. The bands expand during high volatility and contract during low volatility. This creates a dynamic envelope around price that adapts to market conditions.
Key Characteristics
Mean reversion: Price tends to return to the middle band. Band touches: Can signal overbought/oversold conditions. Squeezes: Tight bands often precede big moves. Walking the bands: Strong trends can ride the upper or lower band. Dynamic levels: Bands adjust to current volatility.
Trading Strategies
There are several ways to trade Bollinger Bands. The mean reversion strategy buys when price touches the lower band and sells at the middle or upper band. The breakout strategy watches for band squeezes (low volatility) and trades the breakout direction. The trend strategy looks for price 'walking the bands' as confirmation of strong momentum.
The Bollinger Squeeze
When the bands contract significantly (a 'squeeze'), it indicates low volatility—and low volatility is often followed by high volatility. Watch for the bands to narrow, then enter in the direction of the breakout when price moves decisively outside the bands with volume confirmation. This can capture the beginning of powerful moves.
Practice Risk-Free
Master these concepts with paper trading before risking real capital.
Start Paper TradingDisclaimer: This article is for educational purposes only and does not constitute financial advice. Trading involves significant risk of loss. Cryptocurrency investments are volatile and high-risk. Always do your own research before making any investment decisions.