Trading strategy · Volatility

Bollinger Band Squeeze

Low volatility comes before high volatility.

Level: IntermediateTimeframe: 1H to DailyStyle: SwingMarkets: Stocks, forex, crypto

What it is

Bollinger Bands plot a 20-period moving average with bands two standard deviations above and below. When volatility dries up, the bands pinch together: a "squeeze". Quiet periods tend to be followed by large moves, so the strategy buys when price closes outside the upper band right after a squeeze.

How it works

• Plot Bollinger Bands (20, 2): a 20 SMA with bands at ±2 standard deviations.
• Look for the bands to narrow to their tightest width in months: the squeeze.
• Enter in the direction of the first close outside a band after the squeeze.
• Stop on the other side of the squeeze range, or below the middle band.
• Trail the stop along the middle band while the bands are expanding.

Pros

• Catches volatility expansions early
• Objective volatility measure
• Works in both directions

Cons

• Squeezes can break the "wrong" way first (head fakes)
• Can stay squeezed for a long time
• Needs patience

Common mistakes

• Shorting just because price touched the upper band
• Guessing direction before the breakout
• Using a tight stop inside a noisy squeeze

Lesson transcript

Lesson six: the Bollinger band squeeze. This strategy is built on one of the most reliable patterns in markets. Quiet periods are usually followed by big moves. Bollinger bands draw a twenty period moving average, with a band two standard deviations above and below. When the market is wild, the bands spread wide. When it's calm, they pinch together. Watch the bands here. Volatility dries up. Candles get tiny, and the bands squeeze tighter and tighter. This is the squeeze. Energy is being stored. We don't guess the direction. We let the market tell us. Here, price closes above the upper band. That's our signal. We buy, with a stop below the low of the squeeze. And there's the expansion. The bands blow apart and price trends hard. We trail our stop along the middle band, and stay in as long as price stays above it. One warning. Touching the upper band does not mean sell. In a strong trend, price can walk along the band for a long time. And sometimes a squeeze fakes one way before breaking the other. That's why the stop matters. The rules. Wait for the tightest bands in months. Buy the first close outside the upper band. Stop below the squeeze. Exit when price closes back below the middle band. Recap. Calm comes before the storm. Find the squeeze, let price pick the direction, and ride the expansion. Next, we learn to buy pullbacks with Fibonacci.

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