Bollinger Band Bounce

Bollinger Bands show volatility and potential overbought/oversold conditions. Price at the upper band is stretched high (potentially overbought). Price at the lower band is stretched low (potentially oversold). The middle band is the average price.

Don't buy immediately. Wait for confirmation - a bullish reversal candle like a hammer or bullish engulfing. Also check that the market isn't in a strong downtrend where price could 'walk the band' lower.

The primary target is the middle band (20 SMA). This is where price tends to 'revert to the mean'. Conservative traders exit there. More aggressive traders may target the upper band.

Bands are based on standard deviation. When price moves are large (high volatility), standard deviation increases and bands widen. When price moves are small (low volatility), bands contract. This is automatic and useful.

The standard setting is 20-period SMA with 2 standard deviations. This captures ~95% of price action. Start with these settings. For volatile stocks, try 2.5 std dev. For active trading, try 10-period SMA.

A squeeze occurs when bands contract to unusually narrow width (low volatility). This often precedes a significant breakout. Avoid bounce trades during squeezes - the breakout will blow through the bands.

Look for confluence: Lower band touch + RSI < 30 = strong buy signal. Upper band touch + RSI > 70 = strong sell signal. Wait for RSI to cross back (above 30 for buys) as confirmation.

In strong trends, price hugs one band for extended periods without bouncing. In uptrends, price walks the upper band. In downtrends, it walks the lower band. Bounce trades fail in these conditions.

Use a 50 or 200 MA. If price is above the MA (uptrend), only take lower band bounces (buy dips). If below the MA (downtrend), only take upper band bounces (sell rallies). Trade with the trend.

%B = (Price - Lower Band) / (Upper Band - Lower Band). It shows where price is within the bands: 0 = lower band, 0.5 = middle band, 1 = upper band. Below 0 or above 1 = outside bands.

Plot two sets: 2 std dev (outer) and 1 std dev (inner). This creates zones: buy zone between -1 and -2 std dev, sell zone between +1 and +2 std dev, neutral zone between ±1 std dev. Trade when price enters extreme zones.

When BB contracts inside KC (BB narrower), it's a squeeze confirming low volatility. When BB expands outside KC, it's expansion confirming high volatility. Use for squeeze detection before breakouts.

Average %B across all stocks in market/sector. < 0.2 = market oversold. > 0.8 = market overbought. Use for market timing to identify when many stocks are at extremes simultaneously.

Buy calls at lower band touches (30-45 DTE, ATM). Sell bull put spreads at lower band (credit). Wide bands = high IV = favor selling premium. Narrow bands = low IV = favor buying premium.

Strong trends (ADX > 40) where price walks the band. Squeezes where breakout penetrates bands. News/earnings gaps that blow through bands. Counter-trend trades against strong momentum.