Bollinger Bands were created by John Bollinger in the 1980s. They consist of three lines: a middle band (typically a 20-period Simple Moving Average), an upper band (middle band + 2 standard deviations), and a lower band (middle band − 2 standard deviations). The bands automatically widen when volatility increases and narrow when volatility decreases, making them a dynamic volatility envelope.
The Bollinger Squeeze is one of the most powerful setups. When the bands contract to their narrowest point in several weeks or months, it signals that volatility has compressed — like a coiled spring. Low volatility periods are typically followed by high volatility moves. The squeeze itself does not predict direction, but when price breaks decisively outside the narrow bands on strong volume, a significant trending move often follows. In the EGX, squeezes before earnings or major announcements can lead to explosive moves.
Walking the band occurs during strong trends. In a powerful uptrend, price can "walk" along the upper Bollinger Band, repeatedly touching or exceeding it without reversing. This is NOT an automatic sell signal — it indicates strong momentum. Similarly, in a downtrend, price can walk the lower band. The key distinction: touching the upper band in a range-bound market is bearish, but touching it in a trending market is simply a sign of strength.
Bandwidth measures the width of the bands relative to the middle band: Bandwidth = (Upper Band − Lower Band) / Middle Band. Low bandwidth readings indicate low volatility (potential squeeze). High bandwidth readings indicate high volatility (potential exhaustion). Tracking bandwidth over time helps identify cyclical volatility patterns — stocks tend to alternate between periods of low and high volatility.
%B (Percent B) tells you where price is relative to the bands: %B = (Price − Lower Band) / (Upper Band − Lower Band). When %B is above 1, price is above the upper band. When %B is below 0, price is below the lower band. %B of 0.5 means price is at the middle band. This indicator is useful for identifying overbought/oversold conditions within the Bollinger framework and for spotting divergences.
Practical Bollinger Band strategies: (1) Mean reversion: In range-bound markets, buy near the lower band and sell near the upper band, using the middle band as a target. (2) Breakout: After a squeeze, enter in the direction of the breakout with a stop on the other side. (3) Double bottom with %B: When price makes a double bottom but %B makes a higher low the second time, it is a bullish signal. (4) W-bottoms and M-tops: These are specific Bollinger patterns where the second touch of the band is weaker than the first.
Tips for the Egyptian market: (1) Use 20,2 settings for daily charts — these work well for most EGX stocks. (2) In low-liquidity stocks, widen to 2.5 standard deviations to avoid false signals from erratic price moves. (3) Combine Bollinger Bands with RSI — an RSI divergence at the lower band is a strong buy setup. (4) Volume confirmation is essential — a band break without volume often fails. This is not financial advice.
This content is for educational purposes only and does not constitute financial advice. Always do your own research before making investment decisions.