Bollinger Bands
period = 20 (10–50) • std_dev = 2 (1–3) Overview
Bollinger Bands is a technical analysis tool developed by John Bollinger in the 1980s that helps traders gauge market volatility and identify potential trading opportunities. The bands consist of a centerline (typically a 20-period simple moving average) and two price channels above and below it, defined by standard deviations.
The bands dynamically adjust to market conditions - widening during volatile periods and contracting during consolidation. This self-adjusting nature provides traders with both volatility measurement and a relative definition of high and low prices, making them one of the most versatile indicators across different markets.
Interpretation & Trading Signals
The Bollinger Band Squeeze:
- Setup: Bands narrow to lowest volatility in 6 months - low volatility often precedes high volatility
- Breakout Signal: Price breaks above upper or below lower band after squeeze
- Volume Confirmation: Expanding volume on breakout confirms trader conviction
- Head Fakes: Wait for confirmation - false breakouts that quickly reverse are common
Classic Patterns:
- M-Tops (Double Top): Price touches upper band, pulls back to middle, rallies again but fails to reach upper band
- W-Bottoms (Double Bottom): Price touches lower band, rallies, falls again but holds above lower band
- Walking the Bands: In strong trends, price can "walk" along upper or lower band for extended periods
Key Trading Rules:
- Band Touches Are Not Signals: Price touching bands indicates strength/weakness, not automatic reversal
- Trending vs Ranging: In trends, use bands as dynamic support/resistance; in ranges, look for reversals
- Multiple Closes Outside: Two consecutive closes outside bands often signal continuation
- Bandwidth Analysis: Monitor band width for volatility cycles
Example Usage
Code examples will be available once the Rust implementation is complete.