Bollinger Bands draw a 20-period moving average with an upper and lower band two standard deviations away. Because standard deviation grows with volatility, the bands widen in fast markets and narrow in quiet ones.

Three things they show

1. Relative extremes. Price at the upper band is high relative to the recent past; at the lower band, relatively low. In ranges, traders fade moves to the outer bands back towards the middle line.

2. The squeeze. When the bands contract to their narrowest in months, volatility is unusually low. Low volatility tends to be followed by high volatility, so squeezes often precede strong moves. The squeeze does not tell you the direction; the breakout does.

3. Walking the band. In strong trends price hugs the upper (or lower) band for many candles. Touching the band is then a sign of strength, not a signal to fade.

Using them well

• In ranges: fade the outer bands, target the middle.
• In trends: buy pullbacks to the middle band in an uptrend.
• Around squeezes: wait for a close outside the bands with momentum, then trade the breakout.