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--- trading_strategies:bollinger_band_squeeze [2019/06/24 19:39]
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+++ trading_strategies:bollinger_band_squeeze [2023/09/06 21:22] (current)
jayanthi [Bollinger Band Squeeze FAQs]
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 ====== Bollinger Band Squeeze ======
-===== Introduction =====
+===== What Is a Bollinger Band Squeeze? =====
-The Bollinger Band Squeeze occurs when volatility falls to low levels and the Bollinger Bands narrow. 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 on, a subsequent band break signals the start of a new move. A new advance starts with a squeeze and subsequent break above the upper band. A new decline starts with a squeeze and subsequent break below the lower band.
+A 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 on, a subsequent band break signals the start of a new move. A new advance starts with a squeeze and subsequent break above the upper band. A new decline starts with a squeeze and subsequent break below the lower band.
-===== Defining the Indicators =====
+===== How Do You Set Up the Indicators? =====
-Before looking at the details, let's review some of the 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, which are the default settings. These can be changed to suit one's trading preferences or the characteristics of the underlying security. Bollinger Bands start with the 20-day SMA of closing prices. The upper and lower bands are then set two standard deviations above and below this moving average. The bands move away from the moving average when volatility expands and move towards the moving average when volatility contracts.
+Before 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 security. Bollinger Bands start with the 20-day SMA of closing prices. The upper and lower bands are then set two standard deviations above and below this moving average. The bands move away from the moving average when volatility expands and towards the moving average when volatility contracts.
 {{:trading_strategies:bollinger_band_squeeze:ts-bbsqz-01-gps-exam.png|Chart 1  -  Bollinger Band Squeeze}}
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 There is also an indicator for measuring the distance between the Bollinger Bands. Appropriately, this indicator is called Bollinger BandWidth, or just the BandWidth indicator. It is simply the value of the upper band less the value of the lower band. Understandably, stocks with higher prices tend to have higher BandWidth readings than stocks with lower prices. If price equals 100 and BandWidth equals 5, then BandWidth would be 5% of the price. If price equals 20 and BandWidth equals 1, then BandWidth would also be 5% of price. Keep this in mind when using the indicator.
-===== Strategy =====
+===== How the Strategy Works =====
 The 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 break is bullish, while a downside band break is bearish. Note that narrowing bands do not provide any directional clues. They simply infer that volatility is contracting and chartists should be prepared for a volatility expansion, which means a directional move.
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 {{:trading_strategies:bollinger_band_squeeze:ts-bbsqz-07-nue-fake.png|Chart 7  -  Bollinger Band Squeeze}}
-===== Conclusion =====
+===== The Bottom Line =====
 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. [[https://stockcharts.com/h-sc/ui?s=SPY&p=D&b=5&g=0&id=p94673282496|Click here]] for a chart of the S&P 500 ETF with Bollinger Bands and the BandWidth indicator.
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   and [[[Upper BB (20,2) - Lower BB (20,2)] / Close ] < .04]
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+===== Bollinger Band Squeeze FAQs =====
+==== What is the Bollinger Band Squeeze? ====
+The Bollinger Band Squeeze is a trading strategy that identifies periods when the Bollinger Bands narrow due to low volatility, indicating potential significant price movements in the near future.
+==== What happens after a Bollinger Band Squeeze? ====
+According to John Bollinger, after periods of low volatility (and a squeeze), a subsequent band break signals the start of a significant price move, either upwards (breaking the upper band) or downwards (breaking the lower band).
+==== Is the Bollinger Band Squeeze a directional strategy? ====
+No, the Bollinger Band Squeeze itself does not provide directional clues. It only indicates a pending volatility expansion. Other technical analysis tools are needed to determine the potential direction of the breakout.
+==== How can traders confirm Bollinger Band breaks? ====
+Breaks can be confirmed using basic chart analysis, such as observing a break above a known resistance or below a support level. Unconfirmed band breaks are more prone to failure.
+==== Are there other indicators that can be used alongside the Bollinger Band Squeeze? ====
+Yes, volume-based indicators like the Accumulation Distribution Line, Chaikin Money Flow, Money Flow Index, or On Balance Volume can be beneficial. These can help determine signs of buying or selling pressure within the consolidation.