What Does a Bollinger Band Squeeze Actually Tell You?
Learn how Bollinger BandWidth is calculated and how to interpret a squeeze. Understand why low volatility does not identify direction and how to compare historical ranges and display units.
Bollinger BandWidth expresses relative width by dividing the distance between the upper and lower bands by the middle band. A small width means recent prices have become less dispersed under the selected settings; it does not indicate the direction of the next move. Judge whether bands are narrow by comparing them with the same stock’s historical widths.
Distinguish the ratio from its percentage display
The bands are formed by adding and subtracting a specified multiple of standard deviation around the middle band. Width is calculated as (upper band−lower band)÷middle band, multiplied by 100 when expressed as a percentage. The same condition may appear as 0.08 on one screen and 8 on another. Before comparing readings, check the middle-band period, standard deviation multiplier, price input, and display units. Calling only the distance to the upper band the full band width can create a twofold discrepancy. Band width and the current price’s position within the bands are separate measurements.
A squeeze identifies a period to watch rather than a direction
A period of narrow bands is a candidate for monitoring subsequent movement because prices have clustered in a tight range. That does not mean contraction must be followed immediately by a large rise. Narrow conditions can persist, and price can break downward. If defining a squeeze, establish in advance how low the width must be relative to that stock’s historical distribution and how long it must persist. Labeling only the most visually appealing periods as squeezes after seeing the outcome makes the observation rule difficult to validate.
Do not combine expansion and breakout into one event
Bands can expand both upward and downward as price changes become larger, so expanding width alone does not establish an uptrend. Record separately cases where price breaks upward and then returns inside the range and cases where a single large decline widens the bands. Applying one absolute threshold to both typically volatile and stable stocks can bias candidate selection. Ratios also require care for instruments with a very small middle-band value or changes in their pricing structure. Checking for changes in adjustment conventions, such as stock-split adjustments, can filter out artificial volatility expansion. Include cases that continued moving sideways after a contraction so your observation list also records outcomes with no subsequent movement.
Worked example
Hypothetical example: With a middle band of 100 won, an upper band of 104 won, and a lower band of 96 won, width is (104−96)÷100=0.08, or 8%. If the upper and lower bands later become 106 won and 94 won while the middle band stays unchanged, width increases to 12%. These readings do not reveal whether the current close is 105 won or 95 won. After recording wider bands, separately note the actual direction of the close and whether price broke out of its previous range.
What to check
- Check whether width is displayed as a decimal or a percentage.
- Keep the period and standard deviation multiplier fixed when comparing.
- Judge narrowness against the same stock’s historical distribution.
- Separate width expansion from the direction of the closing-price breakout.
Sources and primary materials
This is educational material about research methods. For an actual company decision, verify the filings and primary sources for the relevant period.