Strategy and analysis
Opening Range Breakout (ORB): A Day Trading Strategy Explained
How the opening range breakout strategy works, choosing the range length, entries, stops, targets, filters and how to measure whether ORB works for you.
Bollinger Bands: Volatility, Squeezes and Mean Reversion
How Bollinger Bands are calculated, what band width tells you about volatility, the squeeze setup, walking the bands in trends, and mean-reversion uses.
Bollinger Bands, developed by John Bollinger in the 1980s, place a band above and below a moving average at a distance based on recent volatility. When volatility rises, the bands widen. When it falls, they narrow.
The calculation
The standard settings are:
- Middle band: a 20-period simple moving average.
- Upper band: middle band + 2 standard deviations of price over the same 20 periods.
- Lower band: middle band − 2 standard deviations.
What the bands tell you
Volatility
Band width shows whether the market is quiet or active. Low volatility tends to be followed by higher volatility, and the reverse. That is the basis of the squeeze.
Relative price
Price near the upper band is high relative to its recent range; near the lower band, low. This is relative, not a signal by itself.
Common setups
The squeeze
When the bands narrow to their tightest in some time, volatility is compressed. Traders watch for a breakout from the squeeze, using other cues such as volume or a level break for direction. See breakout trading.
Walking the bands
In strong trends, price can ride along the upper (or lower) band for many bars. Selling simply because price touched the upper band fights the trend. John Bollinger himself has stressed that a touch of a band is not a signal on its own.
Mean reversion
In ranging markets, some traders buy near the lower band and sell near the upper band, targeting the middle band. This works best when the larger trend is flat, and poorly when a trend begins.
Combining with other tools
- A trend filter, such as the slope of the middle band or a longer moving average, to decide between trend and mean-reversion setups.
- Momentum indicators like RSI to confirm.
- Volume for squeeze breakouts.
Measure your band setups
Tag trades by setup: "squeeze breakout", "band walk", "mean reversion". The three behave very differently, and your results will tell you which suits you. In TradeThink, compare them in the reports and review entries on the price chart. Related: ATR stop loss, another volatility-based tool.
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