The Bollinger Band Squeeze is a trading strategy designed to find consolidations with decreasing volatility. In its purest form, this strategy is neutral and the ensuing break can be up or down. Chartists, therefore, must employ other aspects of technical analysis to formulate a trading bias to act before the break or confirm the break. Acting before the break will improve the risk-reward ratio. Keep in mind that this article is designed as a starting point for trading system development. Use these ideas to augment your trading style, risk-reward preferences and personal judgments. Click here for a chart of the S&P 500 ETF with Bollinger Bands and the BandWidth indicator.
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What Is a Bollinger Band Squeeze?
ByadminA Bollinger Band Squeeze is a condition that occurs when the Bollinger Bands narrow due to decreased volatility. 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…
How the Strategy Works
ByadminThe 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…
Bollinger Band Squeeze
ByadminThis scan divides the difference between the upper band and the lower band by the closing price, which shows BandWidth as a percentage of price. In general, BandWidth is narrow when it is less than 4% of price. Chartists can use higher levels to generate more results or lower levels to generate fewer results. [type…
The Head Fake
ByadminIn his book, Bollinger on Bollinger Bands, John Bollinger advises chartists to beware of the “head fake.” This occurs when prices break a band, then suddenly reverse and move the other way, similar to a bull or bear trap. A bullish head fake starts when Bollinger Bands contract and prices break above the upper band. This…
Tweaking
ByadminBecause the Bollinger Band Squeeze does not provide any directional clues, chartists must use other aspects of technical analysis to anticipate or confirm a directional break. In addition to basic chart analysis, chartists can also apply complimentary indicators to look for signs of buying or selling pressure within the consolidation. Momentum oscillators and moving averages…
How Do You Set Up the Indicators?
ByadminBefore looking at the details, let’s review some 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, the default settings. These can be changed to suit one’s trading preferences or the characteristics of the underlying…