Mmmmm. Bollinger Bands. Probably one of the greatest volatility indicators out there created by the great John Bollinger, who has a full suite of his style of indicators. Without the Bollinger Bands (or BB for short), we wouldn’t get what is now famously known as the Bollinger Squeeze (or BB squeeze).

 

Run down of what Bollinger Bands are

There are three components to Bollinger Bands

  1. Upper Band
  2. Lower Band
  3. Middle Line

Without going into the formula of how these bands are created, let’s just understand two points. First, when the upper and lower bands are close together, this means things are quiet – there is almost zero volatility – prices are trading in a tight range, not a lot going on – this is all called a sqeeze. Second, when the upper and lower bands are spread out, almost looks like a bubble, it means there is quite a bit of volatility – big moves out of consolidation or a squeeze will created expanding Bollinger Bands. The middle line is a simple moving average (defaulted to 20 periods, but I think John Bollinger had it at 21, I could be wrong).

 

How to interpret Bollinger Bands

Probably the biggest thing to notice – and the thing many traders look for – is if price is in a squeezeA squeeze is a big deal – it means things have calmed down a little and that price is getting ready to shoot up and out again. This is always a chicken-or-the-egg debate, but a squeeze happens after a major move and then precipitates a major move. You want to have a squeeze, because it gives you a big heads up to something big coming.

When prices finally do move out of a squeeze, you will see the candlesticks move above or below the bands. This is an important area to watch because you can get a false breakout, but if you see consistent candlesticks closing above (or below) the bands, then you have a very, very powerful signal for a trend trade. The middle line acts as a support (or resistance) level  – you will often find that after a breakout from a squeeze, the first couple tests of the middle line act as support (or resistance). The Bollinger Bands themselves can act as support or resistance – prices sometimes bounce off these levels.

 

Bitcoin is in a Bollinger Band Squeeze – what does it mean?

 

It’s a big friggin’ deal. The last time the Bollinger Bands were this tight was back in July 2nd, 2017. The time before that? September of 2016. Time before that? September of 2015. The point is every time in the past 8 years the Bollinger Bands on the daily chart have become this tight, Bitcoin explodes higher. In fact, the squeeze is one of the final things we notice before prices expand into a new trend.

And Bitcoin doesn’t like to sit in a squeeze for very long – be on the lookout.