Bollinger Bands was developed by John Bollinger in the 1980s. This technical indicator is based on plotting moving averages together with its standard deviations to define upper and lower rate boundaries. These boundaries often form the pricing channels used to measure volatility.
The way to analyse this is by first assuming them as upper and lower bands as the price targets. If the market price falls below the lower price band, it probably indicates buy trigger and vice versa. The prices are assumed to be bounded within the standard deviation. However, there are many occasions where breakouts are happening.
Bollinger Bands for 20 days moving average. A standard setting of Bollinger Bands uses 20days moving average as its median price. The typical standard deviation value is set to be 2.
What are squeeze and the breakouts?
Squeeze happens when the bands come closer. Traders often view this to be a time of lower volatility and is expected with a future increase in volatility. There is a very high possibility that squeeze mode would follow by an breakout. A breakout is defined as the price crossing the Bollinger bands. Usually, a post-breakout scenario is the price will tend to move towards its moving average value.
Bollinger bands help us to identify the buy and sell signals. Wherever the market prices are breaching the bands, there a signal can be inferred from. If the market price goes below the lower band, there exists an opportunity for that buying that stock and similarly where the stock prices cross through the upper band, it is the time to sell.
Case study
Bitcoin prices between 3/7–13/7 are depicted in the figure below. From 4/7 to 5/7, it can be seen that Bollinger Bands was undergoing a squeeze mode. It was expected that a breakout might happen soon. However, it was not known if the market price will go up or down. It was not recommended to do either buy or sell at this point. The entry point should be when the price reached its peak value after breaking out from the Bollinger bands and targeting the moving averages as exit point. In this case, the ideal entry short signal is at 9180 and exit as soon as the price hit the moving average at 9100. A decent 80 pips.
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