Bollinger bands are used to measure market volatility. Basically, this little tool tells us if the market is calm, or if the market is volatile. When the market is quiet, the bands contract, and when the market is volatile, the bands expand. Notice in the chart below that when the price is quiet, the bands were together, but when the price rose, the bands expanded.
Strategies with Bollinger Bands
One thing you should know about bollinger bands is that the price tends to return to the middle of the bands. That is the whole idea behind the bollinger bounce. If this is the case, then looking at the chart below, can you tell me where or which direction the price might go?
What you just saw is a classic bollinger bounce. The reason these bounces occur is because bollinger bands act as mini support and resistance levels. The longer the period you are in, the stronger these bands are. Many traders have developed systems that make use of these bounces, and that is the strategy that is best used when the market is in ranges and there is no clear trend.
On the other hand, we can find the bollinger squeeze is quite explicit. When the bands squeeze, it usually means that a breakout is about to occur. If the candles start to break the upper band, then the move usually continues upward. If the candles start to break below the lower band, then the move usually continues downward.
Now that you know what bollinger bands are, and you know how to use them. There are many other things you can do with bollinger bands, but these are the 2 most common strategies related to the bands.