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As volatility tends to revert to its mean over time, the contraction of the bands often precedes an expansion and a potential price breakout. By monitoring the expanding and contracting bands, traders can anticipate market shifts and improve their trading outcomes.Bollinger Bands track market volatility, expanding during high volatility and contracting during low volatility.
Subsequently, the standard deviation value is multiplied by two, with the resulting product being both added to and subtracted from each data point along the SMA. This process generates the upper and lower bands, delineating the boundaries of the Bollinger Bands.The upper band within Bollinger Bands marks a price level that sits two standard deviations above the middle band, encompassing roughly 95% of the price action.
Bollinger Bands tightening during low volatility signal an impending sharp price move, possibly initiating a trend. This is usually referred to as “the squeeze.”
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