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Trading the Bollinger Band® Squeeze

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Just a quick note before we get started – everything we’ll talk about today should be considered as educational in nature only, not a personalized trading recommendation.

Bollinger Bands can be used in many ways to help set up trades.

Today I’m going to show you an elegant method using the bands that may help you manage a trade after a breakout to maximize your profits

To start, let’s look at how Bollinger Bands generally behave when a stock breaks out of a range.

Notice that when a stock breaks higher, the upper band turns higher as well.

This makes sense, because the price and volatility are both increasing.

But let's look at the lower Band.

As you can see, it actually moves in the opposite direction of the new trend. This is because volatility is expanding.

And the lower band generally will continue to move lower as the stock moves higher with strong momentum.

However, when this upward momentum starts to wane, the lower band will turn back up.

This curl of the lower Band simply means that the upward momentum is slowing – not that it will necessarily reverse.

Because of this uncertainty, I often take an initial profit at this point.

But I will also hold on to some of my position and manage it by using a trailing stop.

If I'm not convinced the uptrend is over, this allows me to take some profit while still staying invested.

If the uptrend continues, great, more profit. But, if the trend reverses, I still have my initial profit, and the amount I could lose is smaller.

As traders we all need to develop trading discipline and as you can see from this example, Bollinger Bands can help.

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.

If you’d like to learn more about technical analysis, join Lee’s Schwab Live weekly webinar “Charting the Markets”, featuring real-time analysis of emerging trends right from  my screen, plus live Q&A.

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Important Disclosures

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. Examples are not intended to be reflective of results you can expect to achieve.

Diversification strategies do not ensure a profit and do not protect against losses in declining markets. 

All expressions of opinion are subject to change without notice in reaction to shifting market conditions.

Past performance is no indication (or "guarantee") of future results.

Schwab does not recommend the use of technical analysis as a sole means of investment research.

The trailing stop feature is not available on all of Schwab's trading platforms. There is no guarantee that execution of a stop order will be at or near the stop price. 

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