how to read bollinger band
The Bollinger Band (BB) is a technical indicator that tells you when the market is calm and when the market is volatile. The indicator appears (overlays) on top of your chart and appears as 3 bands.
When the 3 bands are near each other (meaning when they are squeezed together), it means the market is calm; and is consolidating (meaning gathering momentum) in preparation for a burst of activity/volatility.
When the 3 bands expand and move away from each other, it means volatility is high and prices are moving fast so it is a good time to trade.
Usually when markets are consolidating, the instrument is just trading within a range, not going below a certain price & not going above a certain price range.
During market consolidation, i do not trade, rather i could place pending orders above and below the range to catch the break when it happens in either direction.
If i don't want to use pending orders, i just wait for price to make a break and retest of the range before i enter the market in the direction of the break.
The important thing about BB is that when you see a squeeze of the bands, just know that it is a calm before the storm so prepare for incoming volatility.
As seen in the image, the BB were squeezed together for several hours from 6 am till 2 pm in the afternoon but around 2:30 pm the break happened and the bands expanded & price started climbing up.
Great breakdown on Bollinger Bands, clear and practical.
My suggestions:
- Don’t rely on the squeeze alone for direction. Add volume or a simple candlestick confirmation (like a strong engulfing candle) before jumping in.
- After the breakout, wait for price to retest the middle band or the broken band edge, this filters out many false moves.
- Pair BB with RSI: if the squeeze happens while RSI is neutral (around 45-55), the expansion tends to be stronger and cleaner.
- For pending orders, set them just outside the range with a tight stop beyond the opposite band to keep risk small.
Solid strategy overall