Bollinger bands is an analytical tool used by traders to identify a market’s volatility and looks at the levels of current prices relative to previous trades.
We can see from the above graph that in an instance where there is little volatility the bands contract and as the market becomes increasingly volatile the bands expand.
It may be simpler to look at Bollinger bands as a form of support and resistance.
Often what is seen with Bollinger bands is that as the price deviates within the band it often tends to return back to a middle ground; this is what is known as the Bollinger Bounce.
Often the bands can be seen to “squeeze” together such as in the graph below:
Many traders see a band squeeze as an indication that there is a pending breakout in the market. If the graph is seen to move towards the upper band then an upwards trend is usually expected. The opposite is true when the candlestick is seen to be approaching the lower bound.
An example of a “breakout can be seen below”:
It is not an often occurrence to see a Bollinger squeeze; when looking at a 15 minute candlestick chart it will be experienced only a couple of times a week.
