Bollinger Bands® are a powerful technical analysis tool that helps traders gauge market volatility and predict price trends. This guide explains the four typical patterns of Bollinger Bands: Squeeze, expansion, max bandwidth and bandwalk. Learn how to optimise your trading decisions using Bollinger Bands and enhance your trading strategy with additional technical tools.
In our previous article we have discussed how we can use Bollinger Bands® to help map out our trading strategies for long and short positions. If you would like a refresher on this technical analysis tool that measures how volatile the market for an asset is, do head over to our previous article on Bollinger Bands - Introduction and key points.
In this article we are delving into the typical patterns that one can observe using the Bollinger Bands.
1. Trend change or continuation
Bollinger Bands are a dynamic indicator where the width of the band changes with price movements. Among the various band changes, there are four basic patterns to remember: squeeze, expansion, band walk, and max bandwidth. Understanding these patterns can help determine changes in or the continuation of trends. Figure 1 shows the market conditions when different patterns appear.
Figure 1. Four key patterns
As Figure 1 shows, market changes can be observed at different points: A, where the band squeezes in a stagnant trend; point B, where a breakout occurs leading to an expansion trend; point C, where the trend band indicates the trend will continue; and at D where the trend narrows and returns to a squeeze.
In this example, the basic nature of Bollinger Bands is the oscillation between squeeze and expansion. Although price movements do not exhibit cyclical patterns, there are identifiable periods of volatility. In other words, periods of low volatility result in high volatility and vice versa. Therefore, trends from emergence to completion can be predicted based on the shape of the band.
2. Pattern features
Squeeze
During a squeeze, the bandwidth narrows, and volatility decreases, resulting in a stagnant market. It can also be described as a state of waiting for expansion.
Expansion
When the band widens following a squeeze, it is called expansion. This pattern appears when volatility increases and a trend forms.
Max bandwidth
It is called max bandwidth when the band expands to its maximum width. After the appearance of max bandwidth, the band narrows, and the likelihood of a trend reversal increases.
Band walk
This pattern appears during a continuing trend. In an uptrend, the candlesticks typically move along the +2σ; and in a downtrend, they will move along the -2σ. As long as the trend band continues, it indicates that the trend may persist.
3. Mastering the BandWidth technical indicator
While the width of the upper and lower bands can be assessed simply by looking at them, to achieve an accurate understanding of market conditions, you can utilise BandWidth – a technical indicator based on Bollinger Bands. This indicator depicts the width of the Bollinger Bands with a single line, where a lower value indicates squeeze and a higher value indicates expansion, with the max value representing the max bandwidth.
Determining the state of max bandwidth solely by observing the Bollinger Bands can be challenging, but BandWidth provides a clear understanding at a glance. In Figure 2, the lower purple line indicates the position of maximum fluctuation in BandWidth, or the max bandwidth, highlighting the difficulty of identifying the widest position just by looking at the Bollinger Bands.
In the analysis method recommended by developer John Bollinger, he suggested comparing the squeeze and max bandwidth positions over the past 125 days (125 candlesticks). If the squeeze levels are similar or have smaller compression values and the max bandwidth values are higher, it indicates a higher degree of accuracy. Remember that BandWidth is not a standard indicator of MT4/MT5, so you need to customise it before using it.
Figure 2. BandWidth
Summary
Bollinger Bands is a technical analysis tool which indicates dynamically where the bandwidth changes with price movements. There are basically four characteristic patterns to remember: Squeeze, expansion, band walk, and max bandwidth. Understanding these patterns allows you to grasp trend changes or continuations.
The width of the upper and lower bands of the Bollinger Bands can be assessed by simply looking at them. For a more accurate understanding of market conditions, you can use the technical indicator of BandWidth, which is based on the Bollinger Bands.
The BandWidth depicts the width of the Bollinger Bands with a single line, where a lower value indicates squeeze; a higher value indicates expansion; and the maximum value represents the max bandwidth. Determining the max bandwidth just by looking at the Bollinger Bands can be challenging, but BandWidth can provide a clear understanding at a glance.
Besides Bollinger Bands, you can also explore other tools such as the correlation tool, and currency strength tool. By incorporating these technical analysis tools as part of your trading plan, you can improve your trading performance.
Besides tools and research, successful trading requires discipline and good trade ideas. Sometimes it is easy to lose insight when you are trading alone, working with other traders can help sharpen your skills. A community of traders is also a place for you to ask questions when you are stuck or in doubt and to learn from other people’s mistakes, so you don’t repeat them yourself.
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