Bollinger Bands

Bollinger Bands, developed by John Bollinger in the 1980s, are one of the most versatile volatility indicators available. They consist of three lines: a middle band (typically a 20-period simple moving average) and two outer bands set at two standard deviations above and below. This construction means the bands automatically widen during volatile periods and contract during calm ones.

The statistical foundation is key. If price were normally distributed, roughly 95% of all price action would fall within two standard deviations of the mean. While markets aren't perfectly normal, this framework provides a useful baseline. When price touches or exceeds the upper band, it's statistically extended. When it hits the lower band, it's compressed.

There are two main ways to trade Bollinger Bands. In ranging markets, traders fade moves to the bands — buying at the lower band and selling at the upper. This mean-reversion approach works well when ADX is below 20 and the market lacks clear direction. In trending markets, the opposite applies: price "walking the band" (consistently touching or closing beyond one band) signals a strong move, and traders follow rather than fade it.

The Bollinger Squeeze is perhaps the indicator's most powerful setup. When the bands contract to their narrowest point in several periods, it signals extremely low volatility — and low volatility precedes high volatility. Traders watch for the squeeze, then trade the direction of the breakout when the bands start expanding. Combining the squeeze with momentum indicators like MACD or RSI helps determine which direction the breakout will favor.

Bandwidth, derived from the bands, quantifies volatility as a percentage. It's useful for scanning across multiple instruments to find those setting up for squeeze plays. Bollinger also created %B, which shows where price sits relative to the bands on a 0-to-1 scale. Values above 1.0 mean price exceeds the upper band; below 0 means it's below the lower band.

On MetaTrader, Bollinger Bands are available as a built-in indicator with customizable period, deviation, and shift settings. Many traders adjust the settings based on timeframe — using 10-period bands with 1.5 deviations for scalping on M5, or 50-period bands with 2.5 deviations for daily chart swing trading. The default 20/2 works well for most situations and is the starting point most analysts recommend.

The Bollinger Band walk strategy works in strong trends. When price closes above the upper band for three consecutive bars, it signals powerful momentum — don't fade it. Instead, wait for price to pull back to the middle band (20 SMA) and enter in the trend direction. Place your stop below the lower band and target the upper band for a clean 2:1 risk-reward setup.

For the squeeze breakout, combine Bollinger Bands with volume. When Bandwidth drops below its 6-month low, mark it as a squeeze. Then wait for a bar to close outside the bands on above-average volume. Enter in the direction of the breakout with a stop at the middle band. The volume confirmation filters out weak breakouts that tend to fail.

In ranging markets, the double Bollinger Band strategy uses two sets: one at 2 standard deviations (outer) and one at 1 standard deviation (inner). Buy when price touches the lower outer band and sell at the upper inner band. Sell when price touches the upper outer band and cover at the lower inner band. The inner bands serve as conservative profit targets that get hit more consistently.