Bollinger Bands® is a great indicator. There are thousands of traders around the world who use and trust this indicator religiously. I am one of the Bollinger Bands fans because it works. If you are new to this indicator and you don’t know the basics of using it, we already have some good articles on it on this website that I recommend you to read them first and then come back to this page to learn about Bollinger Bands Squeeze or BB Squeeze which is an important trading strategy: How to Use Bollinger Bands in Forex and Stock Trading
Bollinger Bands Squeeze is a great chart pattern that enables you to locate strong and profitable trade setups. When the market becomes too slow and there is a low volatility, the price moves sideways and the Bollinger upper and lower bands become so close to each other. This is called “Bollinger Bands Squeeze”. You can see it on all time frames very frequently, specially the shorter ones like 15min.
Sometimes Bollinger Bands Squeeze is continued for several candlesticks, and sometimes it is only for a few to few candlesticks. It really doesn’t matter how many candlesticks are inside the squeezed Bollinger Bands. Something that matters is that such a market is not going to remain calm and quiet forever, and this low volatility will be followed by a strong movement finally. This strong movement can be so profitable for the traders if they enter on time.
Bollinger Band Squeeze trade setups are really a great, because the movement that happens after the squeeze is usually too strong, and above all, we can enter with a very tight stop loss and wide target. In many cases we can take a 1:10 position which is great. In other words, Bollinger Bands Squeeze trade setups are really profitable and have a great risk to reward (R/R) ratio because they show us the beginning of the strong movements and hopefully strong and continued trends. On the other hand, it is very easy to locate Bollinger Bands Squeeze trade setups. You just need to be on time enough to enter at the right time.
Now I am going to show you a few of the Bollinger Bands Squeeze trade setups and the way you could take them.
The blow chart shows a BB Squeeze example formed on EUR/USD 15min chart. You can see these kinds of patterns on the 5min and 15min charts a lot, and BB Squeeze is one of the most important strategies that many of the day traders use to trade. The below screenshot shows you how profitable these trade setups are.
As you see the Bollinger upper and lower bands became so close to each other for a few candlesticks (the red arrows). Candlestick #1 is the center of this Bollinger Bands Squeeze which is a very short form of BB Squeeze.
How to Trade the Bollinger Bands Squeeze
When should we enter the market when Bollinger Bands Squeeze forms on the charts?
We should take a position as soon as the market gets out of the range and starts moving strongly again. As you see on the below chart, the price has been moving sideways for several candlesticks before candlestick #1. Do you know what tells you that the market has decided to get out of the range and wants to start moving strongly again? The answer is in Bollinger Bands itself. It tells you when to enter:
You can take a position as soon as the body of one of the candlesticks touches either the Bollinger upper or lower band. If it touches the upper band, it means the market wants to break above the range and go up. If it touches the lower band, it means the market wants to break below the range and go down. The candlestick’s body should touch the upper or lower band and should close while it is still touching the band. I mean touching by the candlestick shadow is not enough. The body should somehow break out of the band. This is something that we call Bollinger Bands Squeeze breakout.
As you see on the below screenshot, the candlestick #2 body has barely touched the upper band. We could go long at the close of this candlestick, however, as the body has not touched the upper band strongly, we wait for another candlestick to form. The candlestick #3 body has strongly touched the upper band. It does not have to be that strong and if I wanted to trade this Bollinger Bands Squeeze trade setup, I would go long at the close of the candlestick #2 or while the candlestick #3 was forming. The entry would be somewhere around the 1.36194 level. I would place the stop loss at the candlestick #2 low price or a little below it. It would be a 2 to 5 pips stop loss. The market went up for 50 pips after the Bollinger Bands Squeeze breakout. That is why I told you that Bollinger Bands Squeeze setups are really profitable and have a great risk/reward ratio.
The below chart shows two examples of Bollinger Bands Squeeze that are longer than the above example. I mean the market has been moving sideways for a longer time.
The one at the left side of the chart has something more than an ordinary trade for you to learn. As you see, after such a long time of moving sideways and inside the squeezed Bollinger Bands, candlestick #1 body touches the upper band. According to what I told you above, we would go long at the close of this candlestick while the stop loss had to be below the low price of the candlestick. However, as you see, it would not work and the market went down and triggered the stop loss. I brought up this example here to tell that even Bollinger Bands squeeze patterns sometimes don’t work. That is why we must always have a reasonable stop loss there to protect our money.
Although our first entry did not work and we lost about 12 pips, the market goes down and candlestick #3 touches the lower band while the Bollinger Bands squeeze is still there and the upper and lower bands are still moving parallel to each other. So we could go short at the close of candlestick #3. As #3 is a long candlestick, the stop loss did not have to be at its open price and it could be set at the middle of the candlestick (a 9 pips stop loss). A 90 pips target (1:10 position) could be easily triggered because the price goes down for 100 pips after the candlestick #3 close (Please note that these are all examples and are not real market reports.)
The second Bollinger Bands squeeze at the right side of the chart is the example of a BB Squeeze that we should not take. The reason is clear. The candlestick that its body has touched and broken out of Bollinger lower band (candlestick #4) is a too long candlestick, and usually the price turns around when such candlesticks form on the charts. We need normal candlesticks to trade. Huge and exotic candlesticks are usually troublesome.
The last thing I have to emphasize about Bollinger Bands Squeeze is that sometimes the market becomes too slow, but it is not moving sideways completely and the candlesticks row make an angle with the horizontal line while the Bollinger Bands Squeeze forms on the chart too. You’d better to avoid this kind of Bollinger Bands Squeeze setups and wait for the ones that the candlesticks are moving completely horizontal, like the above three examples that I showed you.
No trading strategy, including Bollinger Bands Squeeze (BB squeeze) is a Holy Grail and you can wipe out your account with any trading strategy if you don’t take a proper risk and you don’t limit your risk through having a reasonable stop loss and exit strategy. So be careful and always trade like a professional trader who takes care of his capital properly.