# Exploring the Bollinger Band Squeeze Technique
The Bollinger Band squeeze technique is a popular trading strategy among forex and stock market traders. This method is based on the Bollinger Bands, a set of trend indicators developed by John Bollinger in the 1980s. The technique is primarily used to identify periods of low volatility in the market, followed by potential significant price movements. In this article, we will delve into the basics of the Bollinger Band squeeze, its significance, and a step-by-step guide on how to use it.
Understanding Bollinger Bands
Bollinger Bands consist of three lines: the moving average (middle band), the upper band, and the lower band. The upper and lower bands are typically set two standard deviations away from the moving average. This setting can be adjusted based on the trader’s strategy and market conditions. The bands widen during periods of increased volatility and contract during times of low volatility.
Significance of the Bollinger Band Squeeze
The Bollinger Band squeeze occurs when the bands contract and come closer together, indicating reduced volatility in the market. This squeeze is significant because it often precedes a sharp price movement. The squeeze signals that the market is consolidating, and traders anticipate a breakout in either direction. Identifying a squeeze can help traders prepare for a potential entry or exit point before the volatility returns and a new trend emerges.
How to Use the Bollinger Band Squeeze Technique
Using the Bollinger Band squeeze technique involves several steps, starting from setting up the Bollinger Bands on your chart to identifying the squeeze and making a trading decision based on the breakout direction.
Step 1: Setting Up Bollinger Bands
First, add Bollinger Bands to your chart. Most trading platforms provide this indicator as part of their toolkit. The default setting is a 20-day simple moving average (SMA) with the bands set at two standard deviations. However, these settings can be adjusted based on your trading style and the asset you’re trading.
Step 2: Identifying the Squeeze
A squeeze is identified when the upper and lower bands move closer together, indicating that the asset’s volatility is lower than usual. Look for periods where the bands are notably tighter than usual, which suggests that a volatility breakout is imminent.
Step 3: Watch for a Breakout
After a squeeze is identified, watch for the price to break out of the upper or lower band. This breakout is your signal that a new trend may be starting. The direction of the breakout can indicate the likely direction of the trend.
Step 4: Confirm the Breakout
Before making a trade, it’s crucial to confirm the breakout. A common confirmation is to wait for a candlestick to close outside the Bollinger Band. Additional indicators, such as volume or other momentum oscillators, can also provide confirmation.
Step 5: Entry and Exit Points
Once a breakout is confirmed, you can enter a trade in the direction of the breakout. Setting stop-loss orders just beyond the opposite band or the breakout point can help manage risk. Exit points should be based on your trading strategy’s goals, whether it’s a set profit target or another indicator’s signal for trend reversal.
Conclusion
The Bollinger Band squeeze technique is a powerful tool for traders aiming to capitalize on periods of low volatility followed by strong market movements. By understanding how to set up, identify, and act on signals provided by the Bollinger Bands, traders can potentially improve their trading strategies and make more informed decisions. Remember, no strategy guarantees success, and it’s vital to combine the Bollinger Band squeeze with other market analysis methods and a solid risk management plan.
