Bollinger Bands and the squeeze
Bollinger Bands draw price's normal range of movement; narrowing bands say the market is coiling, widening bands say a move has started.
In the chart above you see three grey lines around price. The middle one is the average of the last 20 candles. The upper and lower lines sit two times price's normal deviation away from that average. These three lines are called Bollinger Bands.
The bands are not fixed; they open when the market gets active and narrow when it calms down. Price spends most of its time inside them. Touching the upper band means ‘price is high compared with its recent normal’, touching the lower band means ‘low compared with its normal’. That alone does not mean expensive or cheap; in strong trends price can walk along the edge of the band for days.
The most instructive state of the bands is the squeeze. If you see a zone where the bands have narrowed a lot, shaded in orange on the chart, that is a squeeze: price has moved in a very tight range for a while and volatility has dropped. Markets alternate between quiet and active periods; a long silence often comes before a sharp move.
But a squeeze does not tell you the DIRECTION of the move. When the bands start to open, price can break up or down. What you should do when you see a squeeze is prepare, not predict: mark the levels for both directions and wait for the breakout.
The width of the bands also hints at stop distance. On an active symbol with wide bands, a very close stop gets hit by ordinary swings; on a calm symbol with narrow bands, the same distance is wider than needed. In short, the bands give you a visual answer to the question ‘how much is this symbol moving right now?’
How to read it
- Look at the width of the bands: narrow bands show a calm market, wide bands an active one.
- Find the orange-shaded squeeze zone and see how the bands opened afterwards: did the move continue in the direction of the breakout?
- Do not treat touching the edge of the band as a signal on its own: in a strong advance price walks leaning on the upper band; that is strength, not weakness.
- Prepare two scenarios during a squeeze: what do you do on a close above the upper band, and on a close below the lower band? Put your stop on the other side of the breakout.
In this state right now
Liquid symbols with the narrowest bands on the daily chart right now (band width less than 5 percent of price).
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We measured
On crypto we compared reversal signals inside a squeeze with those outside it. The squeeze filter behaved like a random filter: the signals it removed were not clearly worse than the ones it kept. So simple rules like ‘do not trade in a squeeze’ or ‘only trade in a squeeze’ gave no edge in our measurement.
Source: BBL measurement bench: 16 crypto pairs, 4 hour / 1 hour / 15 minute, about 38,000 MACD reversal signals ·
Trap
The most common mistake is guessing the direction after spotting a squeeze and taking a position early. Squeezes often make a false breakout in one direction first and then go the other way. The second mistake is buying because price touched the lower band and ‘got cheap’; in a downtrend price can keep falling while walking along the lower band.
Tip
The ‘Narrow Band Consolidation’ list in the screener finds calm, quiet symbols. It is not a buy list but a watch list: it shows candidates whose breakout you will wait for.
Glossary
- Bollinger Bands
- Three lines made of a 20-candle average and two standard deviations above and below it.
- Squeeze
- A period when the bands narrow unusually and volatility drops.
- Breakout
- Price closing outside a squeeze range or a level.
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