You'd be hard-pressed to find a trader who has never heard of John Bollinger and his namesake bands. He calls it "the Squeeze. Here we look at the squeeze and how it can help you identify breakouts.

While it can be a real challenge to forecast future prices and price cycles, volatility changes and cycles are relatively easy to identify. This is because equities alternate between periods of low volatility, followed by periods of high volatility, and so on - much like the calm before the storm and the inevitable inactivity afterward. Bollinger suggests that, to determine breakout direction, it is necessary to look to other indicators for confirmation.

If there is a positive divergence - that is, if indicators are heading upward while price is heading down or neutral - it is a bullish sign. For further confirmation, look for volume to build on up days.

On the other hand, if price is moving higher but the indicators are showing negative divergence, look for a downside breakout, especially if there have been increasing volume spikes on down days. Another indication of breakout direction is the way the bands move on expansion. When a powerful trend is born, the resulting explosive volatility increase is often so great that the lower band will turn downward in an upside break, or the upper band will turn higher in a downside breakout.

See Figure 1 below, which shows the May KBH breakout. Bandwidth reaches a minimum distance apart in May indicated by the blue arrow in window 2 , followed by an explosive breakout to the upside. Note the volume build that occurred beginning in mid-April through July. It is not unusual for a security to turn in one direction immediately after the squeeze, as if to trick traders into thinking the breakout will occur in that direction, only to reverse course and make the true and more significant move in the opposite direction.

Traders who act quickly on the breakout get caught offside, which can prove extremely costly if they do not use stop-losses.

Bollinger Bands - Wikipedia

Those expecting the head fake can quickly cover their original position and enter a trade in the direction of the reversal. In Figure 2, Amazon.

AMZN looked to be giving a squeeze set-up in early February There is negative divergence between the RSI line 1 of window I , the intraday intensity line 2 of window II , accumulation-distribution index line 3 or window II and price line 4 of window III - all of which point to a downward breakout.

Breaking above the day moving average the orange line in the lower volume window on drops in stock price, suggesting a build up in selling pressure, volume shows above normal values on downside price moves. Finally, the long-term trend line is breached to the downside in the first week of February.

A downside breakout would be confirmed by a penetration in the long-term support line line 5 of window III and a continued increase in volume on downside moves. The challenge lies in the fact that the stock had demonstrated a strong up trend, and one pillar of technical analysis is that the dominant trend will continue until an equal or greater force operates in the opposite direction.

This means that the stock could very well make a head fake down through the trend line and then immediately reverse and breakout to the upside. It could also fake out to the upside and break down. While it looks set to breakout to the downside along with a trend reversal, one must await confirmation that a trend reversal has taken place and, in case there is a fake out, be ready to change trade direction at a moment's notice.

By using non-collinear indicators, an investor or trader can determine in which direction the stock is most likely to move in the ensuing breakout. With a little practice using your favorite charting program, you should find the squeeze a welcome addition to your bag of trading tricks.

Dictionary Term Of The Day. A measure of what it costs an investment company to operate a mutual fund. Latest Videos PeerStreet Offers New Way to Bet on Housing New to Buying Bitcoin? This Mistake Could Cost You Guides Stock Basics Economics Basics Options Basics Exam Prep Series 7 Exam CFA Level 1 Series 65 Exam. Sophisticated content for financial advisors around investment strategies, industry trends, and advisor education.

Profiting From The Bollinger Squeeze By Matt Blackman Share. Here is the squeeze equation: Figure 1 — Weekly chart of KB Home showing the squeeze pattern setting up in the year leading up to May Chart provided by Metastock.

Figure 2 — A squeeze in the making. Here we see on the weekly chart of Chart provided by Metastock. Learn how to combine average true range, simple moving average and Bollinger band indicators to gauge market volatility.

We'll show you which candles shed light on successful trend trades. In the s, John Bollinger developed the technique of using a moving average with two trading bands above and below it. Learn how this indicator works, and how you can apply it to your trading. Pick tops and bottoms while still trading within the overall framework of a trend. This intraday strategy picks tops and bottoms based on a clear recovery following an extreme move.

Profiting From The Bollinger Squeeze

Learn more about Bollinger Bands, a tool based on standard deviations of moving average that can be applied to both high Learn how traders use Bollinger Bands to identify breakouts. Breakouts are moves in price to new highs.

Discover how the dynamic nature of Bollinger Bands makes them a very useful indicator for securities that have historically Learn about John Bollinger and his widely followed indicator, Bollinger Bands. Explore how traders interpret the different Use Bollinger Bands to identify volatility changes and place options trades at the right time; profit in bull or bear markets Find out how investors or traders would use Bollinger Bands and why they are more useful for technical traders than long-term An expense ratio is determined through an annual A hybrid of debt and equity financing that is typically used to finance the expansion of existing companies.

A period of time in which all factors of production and costs are variable. In the long run, firms are able to adjust all A legal agreement created by the courts between two parties who did not have a previous obligation to each other.

A macroeconomic theory to explain the cause-and-effect relationship between rising wages and rising prices, or inflation.

How are Bollinger Bands® used in forex trading? | Investopedia

A statistical technique used to measure and quantify the level of financial risk within a firm or investment portfolio over No thanks, I prefer not making money. Content Library Articles Terms Videos Guides Slideshows FAQs Calculators Chart Advisor Stock Analysis Stock Simulator FXtrader Exam Prep Quizzer Net Worth Calculator. Work With Investopedia About Us Advertise With Us Write For Us Contact Us Careers.

Get Free Newsletters Newsletters.

All Rights Reserved Terms Of Use Privacy Policy.