Bollinger Bands: Volatility Squeeze & Expansion

Lesson Content

Bollinger Bands are a powerful technical analysis tool used by traders to measure market volatility and identify potential price breakouts. In the Indian stock market context, these bands consist of three lines: a simple moving average (typically 20 periods) in the middle, an upper band, and a lower band. The upper and lower bands are usually set two standard deviations away from the moving average. When the bands narrow, it indicates a period of low volatility, known as a 'squeeze,' which often precedes significant price movements. Conversely, when the bands widen, it signals increased volatility and potential trend continuation. For example, when looking at Reliance Industries on the NSE, a Bollinger Band squeeze might occur before an earnings announcement, suggesting that the stock is preparing for a major move. Similarly, Infosys often shows band expansions during volatile market conditions, indicating increased price swings. Understanding these patterns can help Indian traders make more informed decisions about entry and exit points.