Bollinger Bands
Bollinger Bands are a dynamic volatility indicator that frames price with a moving average and two standard deviations. Designed by John Bollinger in the 80s, they automatically adapt to the asset's volatility regime: they widen when the market moves strongly, tighten when it sleeps.
Definition and formula
Upper band = SMA(20) + 2 × σ(20)
Lower band = SMA(20) − 2 × σ(20)
Where σ(20) is the standard deviation over 20 periods. The standard parameters 20 periods / 2σ are those used by Cash Scanner. Statistically, about 95% of prices fall within the channel if the distribution is normal (in practice, the fat tails of markets make it closer to 88-92%).
How to read Bollinger Bands
Relative position of price
- Price near the upper band: strong bullish thrust. DO NOT interpret as an automatic sell signal — in a strong trend, price "walks the band" for weeks.
- Price near the lower band: strong selling pressure. Relevant for a technical rebound if confluence with other signals (RSI < 30, historical support).
- Price on the middle band (SMA 20): equilibrium zone. Often acts as support in uptrends or resistance in downtrends.
Bollinger squeeze
The squeeze is the most actionable signal. It happens when both bands tighten sharply — volatility hits a historical floor. Reading:
- Compression phase: the market is "charging" energy. Volatility never stays low for long: a breakout will follow.
- Breakout direction: CANNOT be inferred from the squeeze alone. Must confirm with another indicator (MACD for direction, volume for conviction).
- False breakout: if the initial move is low-volume, wait for close before taking a position. Many squeezes fail on the first attempt.
Bandwidth (BBW)
The bandwidth (BBW = (upper − lower) / middle) quantifies volatility. Comparing current BBW to its 200-day percentile reveals whether you're in a calm or agitated regime — useful for sizing.
How Cash Scanner uses Bollinger Bands
- Volatility score component: a recent squeeze (BBW at year-low) is valued in Phoenix mode (early entry on potential breakout).
- near_support signal: if price touches the lower band AND the bottom of 52-week range AND RSI < 30, the "near_support" signal triggers. One of the historically most reliable entry signals.
- Risk filter: a price "stuck" to the upper band for 5+ sessions penalizes the score in Phoenix mode (late, overpriced entry).
Limits and common pitfalls
- Inverted bands in trends: in a prolonged bear market, price can drop along the lower band for weeks. Buying every touch of the lower band is the fastest way to get burned.
- Non-normal distribution: financial markets have much fatter tails than a normal law. Relying on the "95% statistical" to short above the upper band is a bad idea.
- Parameters 20/2σ not universal: on highly volatile assets (crypto, small caps), switching to 2.5σ or 3σ reduces false signals. Cash Scanner stays on 20/2 for cross-asset coherence.
- Prolonged squeeze: not all squeezes produce a breakout within the week. Some last for months. Patience required.