Strategy Library

Breakout

Bollinger Band squeeze

John Bollinger's observation that quiet spells tend to be followed by busy ones. When the bands (a 20-period average plus and minus 2 standard deviations) narrow to their tightest in about six months, a bigger move often follows. The squeeze gives no direction: you wait for a band break, confirm it on the chart, and watch for a head fake, a first break that reverses.

IntermediateStocks in the source (daily bars); the sources give no guidance for other markets or timeframesDaily bars in the sourceH4, D1
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Example 01

Bollinger Band squeeze on a chart

US100 · D1Squeezepinch, break

BandWidth low: 0.10%Upper band at break: 18,230.42Close: 18,330.00Sample candles, not market data

The rules

Setup
  • Bollinger Bands at 20 periods and 2 standard deviations
  • A squeeze: BandWidth near the low of its six-month range (some use the lowest quarter of it)
Entry
  • Upside: a break above the upper band, confirmed on the chart (a break of resistance); downside: below the lower band, confirmed by a break of support
  • Or Bollinger's stricter version: a close inside the bands, then a close outside, then price beyond that close on the third day
Stop
  • The sources give no stop. Set your own, such as beyond the other band or the other side of the squeeze
Target
  • The sources give no target. Set your own; closes outside the bands are first read as continuation
Manage
  • If price comes straight back inside the bands, the break has lost its strength

Common mistakes

  • Reading the squeeze as a direction. Narrow bands say a move may come, not which way.
  • Treating a band touch as a signal. Bollinger: tags of the bands are just tags, not signals.
  • Taking unconfirmed breaks. Those are the ones that turn into head fakes.
  • Comparing BandWidth across markets. A calm market and a wild one have different normal widths.

When it's off

  • A head fake: the break reverses back inside and then breaks the other band
  • A squeeze alone is not a signal: no break, no trade

Words to know

Breakout
Price moves through a support, resistance or range edge and a candle body closes beyond it. A wick beyond that closes back inside is a sweep, not a breakout.
False breakout
Price breaks beyond a level but cannot stay there and comes back inside, trapping breakout traders. It is only known after the return, never at the breakout candle's close.
Bollinger Bands
A 20-period average with bands 2 standard deviations above and below it.
BandWidth
The distance between the bands as a share of the middle line.
Head fake
A first band break that reverses into a move the other way.

When you make it yours, I'll ask what the rules above leave open. Start with one of these:

  • How exactly do you define narrow: a six-month low, the lowest quarter, or a percentage of price?
  • What tells you the direction before or at the break?
  • Do you enter on the touch, the close outside, or the third-day follow-through?
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What testing exists

A study of Bollinger Band signals found them unable to beat buying and holding after costs. It tested band signals in general, not the squeeze.

Before you trust a backtest

  • Many professional traders risk under 1% of their account on one trade idea, and the common guideline is 1 to 2%.
  • The more versions of a rule you try on the same data, the more likely a good backtest is luck. Decide your rules before you test.
  • Include spread and commission, and practice on dates you have not looked at, before you trust a result.

Sources