BOLLINGER BAND SQUEEZE

Bollinger Bands
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We all are familiar with the much popular Bollinger bands (BB). It has two bands - Upper BB and Lower BB. These bands envelope the price of an instrument and are plotted at a standard deviation level above and below a simple moving average (sma) of the price (20 sma in most cases). BBs help in determining whether the price is high or low on a relative basis.

The Squeeze
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One of the most effective way to utilize BB in a trending environment is to trade the squeeze.

In order to understand squeeze you must know what is volatility.
Volatility is simply the rate at which the price of an instrument increases or decreases over a particular period.
In other words, If the price of an instrument is fluctuating up and down very fast in a short interval of time, hitting highs and lows, it is said to be highly volatile. On the other hand, If the price is moving up or down more slowly, or is relatively stable, it is said to have low volatility.

BB works on the basis of volatility. When the volatility is higher, the BB expands and when the volatility drops to historically lower levels, the BB squeezes. John Bollinger used an indicator known as 'Band width' to measure volatility.

According to John when Band width drops to its six month lows, it leads to squeeze.

Squeeze is seen when price trades in a narrow range, or consolidates as we call it very often. Under such conditions, the UB and LB come closer to each other or pinch together. It often reminds me of watering plants with a garden pipe. We pinch the pipe so as to control the flow and increase the range of sprinkles. Same is true for BB. The pinch or squeeze (low volatility environment) leads to expansion (high volatility environment). So low volatility leads to high volatility and vice versa.

Points to be noticed before trading squeeze:
First, the price must gyrate in a narrow range for some time;
Secondly, the Band Width should drop to its six month low value;
Thirdly, expansion in the direction of the primary trend will bring the odds in your favor. Following primary trend will also help avoiding fake moves against the trend.

Above Nifty chart is a good example of squeeze on the daily timeframe. The band width value reduce to 0.02 in July 2021 from 0.09 in 2021 June. Also observe the price movement and a small fake out against the primary trend at the end of July. Finally Nifty expanded in the primary direction.

I hope you enjoyed reading.
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Regards

Comment:

Even with smaller degree squeezes results are good.
You just have to pick the right direction.

If price is trading between sma and UB, then buy near the sma.

When price starts trading between sma and LB, it leads to correction or consolidation. Let the trend reverse and then short trade the weak pullbacks to sma.

Comment:

This is BNF 60min chart.
For short term trading one can use 60 min.
Just pullup 100 bars on the chart and notice band width. If it is at its lowest extreme then look for an opportunity.

At squeeze 1, there was an expansion and side ways move in the background. It gave a fake out and then next day gapped up. This is a short term buying opportunity coz those who got trapped on the downside will surely cover at the gap leading an up move.

At squeeze 2, we have an expansion followed by another failed attempt by the market to move further. This happened because the trend on the higher timeframes is bearish. One can exit the long positions at the red bar close and reverse to a short position.

At squeeze 3, we did not have any expansion prior to it but there is a very low value on the band width chart, signaling a blasting move coming ahead. There was a fake bar formation on 16 Dec 14:15 but the next bar was never up to reverse position. Once it breaks the low of this bar is another short opportunity for an expansion.

After trading this pattern for some time, you just have to eye ball at bollinger band to look for opportunities. Just don't dive too deep in to lower timeframes. I think below 60min this pattern loses its relevance.

Comment:

Any technical pattern defines your edge in trading. You may face psychological errors while trading in the real market but that's a very different topic that can be addressed through a different post.

Good luck.

Comment:

Just one more thing. As I said high volatility lead to low volatility and vice versa. Volatility is high when bands are expanding. Last time it happened in April when band width went to 0.12 after a downtrend. It was a shakeout at the end of a down move.
Same stats can be observed in this down move too. Can't say if it can reverse from here or not. But if it starts building a broad range here then its possible that it pulls back.

Comment:

This is just a demonstration showing how an expansion may follow a contraction and then again an expansion, in a strong trend.

Comment:

Thanks for bearing with me.