Trading the Bollinger Band Squeeze


Bollinger bands are indicators of volatility
– when they’re far apart volatility is high and when they squeeze together, volatility
is low. The Squeeze strategy zeros in on periods when
the bands are close together, because this signals that an increase in volatility is
coming. This move in volatility may be explosive,
AND brings the potential to catch an attractive trading opportunity. Let’s take a look at how to use this strategy. The Squeeze starts when the bands are the
narrowest they’ve been over the past six months. Just be sure to check the news. You want to make sure there is not some corporate
event that is causing the squeeze. When volatility has been low for an extended
amount of time, pressure builds, like a spring that’s wound too tightly. While we don’t know the direction, we do
know that we are setting up for a decisive move. There are several possible strategies that
can be used in this situation. One strategy I often use to trade a squeeze
is to place a buy entry point directly above the upper Bollinger Band and a sell short
entry point directly below the lower band. That way, I can be taken into the trade in
either direction when volatility expands. Once I am in the trade, I’ll place an initial
stop under or over the opposite band. Going forward, I manage the trade using a
trailing stop. This allows me to lock in gains as the trade
progresses. Keep in mind, as John Bollinger himself says,
Bollinger Bands do not provide continuous advice; rather they help identify setups where
the odds may be in your favor. There are many strategies for using Bollinger
Bands. Watch the other videos in this series, or
for more trading strategies, visit schwab.com/Trading Insights.

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