What are the best Bollinger Band settings for swing trading?

The defaults of 20 periods and two standard deviations are what most traders use, and there is some benefit in reading the same bands as everyone else. John Bollinger suggested widening the multiplier a little for longer averages and narrowing it for shorter ones. Whatever you pick, keep it fixed while you learn how a stock behaves inside it.

What happens after a Bollinger Band squeeze?

Volatility tends to expand again, since quiet stretches rarely last forever. The squeeze does not say which way the expansion will go. Traders usually wait for a close outside one band, often with rising volume, and treat that as the direction, keeping in mind that the first break out of a squeeze is sometimes a head fake.

Bollinger Bands: The Bands, the Squeeze and What They Measure

Open a daily chart. Add a 20-day simple moving average of the close. Measure how far the last 20 closes have scattered around that average, as a standard deviation, and draw one line two standard deviations above the average and another two below. That is the whole indicator. John Bollinger introduced it to show volatility as a shape on the price chart.

A worked set of bands

Bandwidth is the gap as a share of the middle line. It lets you compare a $40 stock with a $400 one. Cut the standard deviation to $0.50 and the bands sit at $41 and $39. Bandwidth drops to 5%.

The middle band is an ordinary simple moving average. The moving average calculator gives the same value.

How it shows up on a chart

The upper band, middle line and lower band track the bars. The space between the outer bands is often shaded. The label usually reads “BB (20, 2)”. The bands bulge after a sharp move and pinch together in a quiet one. Some platforms add companion readings in a lower panel: bandwidth, as above, and %B, which puts the latest close on a scale where 0 is the lower band and 1 is the upper band. With the bands at $37 and $43, a close of $42.25 gives %B of ($42.25 - $37) / $6, or 0.875, which puts it near the top of the envelope. A %B above 1 means the close landed outside the upper band. Below 0, outside the lower.

The squeeze

When bandwidth drops to one of its lowest readings in months, traders call it a squeeze. It means the stock has gone unusually quiet. Quiet stretches end. Volatility in markets tends to come in clusters, so a long calm is often followed by a burst, and a squeeze is a way of spotting the calm before the burst starts.

Which direction the burst goes is the part the bands cannot tell you. A squeeze is equally at home before a breakdown and before a rally, and the first move out of it is sometimes a feint that reverses within a few bars. Most traders who trade the squeeze wait for a close outside a band, then use the opposite side of the recent range, or a multiple of average true range, for the stop.

Touching a band

A close at the upper band gets read as overbought. Often it means the reverse: the stock is strong.

In a trend, price can walk along one band for weeks. Each new high pushes the upper band up with it, and the closes keep landing on or near it, and a trader who sells every touch keeps selling into the strongest part of the move. In a range, touches do tend to fade toward the middle. That split is the same one discussed in trend following or mean reversion: the bands look identical in both markets, and your read of the trend decides what a touch means.

What two standard deviations does and does not mean

Two standard deviations is a convention. Statistics textbooks say about 95% of values fall within two standard deviations for a normal distribution, and that figure gets repeated as if price stayed inside the bands 95% of the time. It does not follow. Price changes have fatter tails than a normal distribution, meaning big moves happen more often than the bell curve allows, and the bands are recalculated every bar from only 20 closes, so the share of closes outside them varies from stock to stock and year to year.

What people get wrong

Treating a touch as a signal is the first mistake. Reading a squeeze as bullish is the second. The third is forgetting the bands use closes only. An intraday spike that closes back near the middle barely registers.

Average true range is the other common volatility measure. It counts gaps and intraday range. Keltner channels draw a similar envelope using ATR. For how the bands fit with other chart tools, see what is technical analysis.