Bollinger Bands were developed by John Bollinger and consist of three lines — a moving average in the middle and two bands based on standard deviation above and below. They dynamically adjust to market volatility, widening during high volatility and contracting during low volatility.
Bollinger Bands Calculation (Default: 20 period, 2 standard deviations)
Middle Band = SMA(20)
Upper Band = SMA(20) + (2 × Standard Deviation)
Lower Band = SMA(20) − (2 × Standard Deviation)
What Bollinger Bands Tell You
- Wide bands → High volatility — large price moves are occurring
- Narrow bands → Low volatility — price is consolidating (the Squeeze)
- Price at upper band → Relatively expensive vs recent history
- Price at lower band → Relatively cheap vs recent history
About 95% of all price action occurs within the Bollinger Bands when using 2 standard deviations. Price touching the outer bands is statistically unusual and often signals a reversal or continuation.
The Bollinger Squeeze — Most Powerful Setup
When the bands become very narrow (a "squeeze"), it signals that a big move is coming. The direction of the breakout tells you which way to trade.
Squeeze Breakout Strategy:
1. Wait for bands to narrow (squeeze) — bandwidth at multi-month low
2. Enter in the direction of the breakout when price closes outside a band
3. Target: Opposite band
4. Stop Loss: Below/above the middle band (SMA 20)
Works well on: NIFTY, BANK NIFTY, large-cap stocks after earnings consolidation
1. Wait for bands to narrow (squeeze) — bandwidth at multi-month low
2. Enter in the direction of the breakout when price closes outside a band
3. Target: Opposite band
4. Stop Loss: Below/above the middle band (SMA 20)
Works well on: NIFTY, BANK NIFTY, large-cap stocks after earnings consolidation
Mean Reversion Strategy
Lower Band Bounce (Range-bound markets only):
Entry: Price touches or closes below the lower band + RSI below 30
Exit: Price reaches the middle band (SMA 20) or upper band
Stop Loss: 1% below the lower band entry
Works best on: Banking stocks, FMCG sector
Entry: Price touches or closes below the lower band + RSI below 30
Exit: Price reaches the middle band (SMA 20) or upper band
Stop Loss: 1% below the lower band entry
Works best on: Banking stocks, FMCG sector
Never use the mean reversion strategy in a strong downtrend. Price can "walk the band" — hugging the lower band for many candles. Always confirm with RSI or another momentum indicator.
%B Indicator
%B tells you where price is within the Bollinger Bands on a scale of 0 to 1:
- %B = 1.0 → Price is at the upper band
- %B = 0.5 → Price is at the middle band
- %B = 0.0 → Price is at the lower band
- %B above 1.0 → Price is above the upper band (strong breakout)
Best Settings for NSE
| Settings | Use Case |
|---|---|
| 20 period, 2 SD (default) | Standard swing and positional trading |
| 20 period, 1.5 SD | More signals, earlier entries |
| 50 period, 2 SD | Long-term trend analysis |