Bollinger Bands are a volatility indicator that builds a dynamic channel around price based on standard deviation. Unlike fixed support and resistance levels, Bollinger Band boundaries automatically widen and narrow depending on the asset's current volatility.
The indicator's structure
Bollinger Bands consist of three lines: a middle line, a simple moving average (usually with a 20 period), and two outer lines set a defined number of standard deviations (usually two) from the middle. The higher the current volatility, the wider the outer lines spread apart, and the lower the volatility, the narrower the channel becomes.
The squeeze signal
A narrowing of the Bollinger Bands (known as a "squeeze") indicates falling volatility and often precedes a sharp price move in one direction. The squeeze signal itself doesn't show the direction of the coming move, so it's usually used as a warning of an approaching impulse that requires additional direction confirmation from other indicators.
The bounce-off-boundary signal
In a ranging market, price often oscillates between the upper and lower boundaries of the channel, allowing a classic bounce logic: buy at the lower boundary, sell at the upper one, expecting a return to the middle line. This approach pairs well with the range-trading strategy described in the article on the range strategy.
The breakout signal
During a strong trending move, price can move beyond the channel and run along its outer boundary without returning to the middle line. In that case, trying to trade a bounce leads to a string of losses — instead, a channel breakout on high volume should be read as confirmation of trend strength, similar to the logic in the article on the breakout strategy.
How to tell a range apart from a trend starting on Bollinger Bands
The difference between ranging behavior and a trend starting is visible in the channel's shape: during a range, the channel stays relatively stable in width while price oscillates inside it. When a trend begins, the channel starts to widen, and price closes near the outer boundary for several periods in a row without returning to the middle line.
Tuning Bollinger Bands parameters
The standard settings (20-period, two standard deviations) suit most situations, but on short binary options timeframes the period is sometimes shortened to 10–14 for a faster reaction to volatility changes. Reducing the number of standard deviations narrows the channel and makes it more sensitive, but increases the number of false signals.
Combining with other indicators
Bollinger Bands are often paired with oscillators like the Stochastic Oscillator, to confirm bounce signals with an additional overbought/oversold reading. For more on how this oscillator works, see the article on the Stochastic Oscillator.
Automating Bollinger Band calculation
Calculating channel width, detecting a squeeze, and confirming signals can be automated. A trading robot for Pocket Option can track the channel's state in real time and generate signals when set conditions are met — details on the features page.
Conclusion
Bollinger Bands are a versatile indicator, suited to both ranging and trending markets provided the channel's behavior is read correctly. Use a squeeze as a warning of an approaching move and tell a bounce apart from a breakout by channel width and trading volume. Automatic calculation is available in the robot's plans.