Article
Bollinger Band Squeeze
Bolling Band Squeeze Trading Strategy
Basics
Introduction
The Bollinger Band Squeeze occurs when volatility falls to low levels and the Bollinger Bands narrow. According to John Bollinger, periods of low volatility are often followed by periods of high volatility. Therefore, a volatility contraction or narrowing of the bands can foreshadow a significant advance or decline. Once the squeeze play is on, a subsequent band break signals the start of a new move.
A new advance starts with a squeeze and subsequent break above the upper band. A new decline starts with a squeeze and subsequent break below the lower band.
- Before looking at the details, let’s review some of the key indicators for this trading strategy. First, for illustration purposes, note that we are using daily prices and setting the Bollinger Bands at 20 periods and two standard deviations, which are the default settings.
- These can be changed to suit one’s trading preferences or the characteristics of the underlying security. Bollinger Bands start with the 20-day SMA of closing prices. The upper and lower bands are then set two standard deviations above and below this moving average.
- The bands move away from the moving average when volatility expands and move towards the moving average when volatility contracts.
Trading Strategy
Bollinger Band Squeeze
- The Bollinger Band Squeeze is a straightforward strategy that is relatively simple to implement.
- First, look for securities with narrowing Bollinger Bands and low BandWidth levels. Ideally, BandWidth should be near the low end of its six-month range. Second, wait for a band break to signal the start of a new move. An upside bank break is bullish, while a downside band break is bearish.
- Note that narrowing bands do not provide any directional clues. They simply infer that volatility is contracting and chartists should be prepared for a volatility expansion, which means a directional move.