Bollinger Squeeze Breakout (Breakout)
Bollinger's Squeeze: waits for the band width to hit a 125-bar low — the market coiling into unusual calm — then buys the first close above the upper band and sells when price falls back below the midline.
How It Works
- Compute 20-bar Bollinger Bands and watch their relative width — upper band minus lower band, divided by the middle. Narrow bands mean the market has gone unusually quiet.
- A squeeze is on when the width hits its lowest value of the last 125 bars: volatility is as compressed as it has been in roughly six months of bars, and quiet markets tend to resolve into violent moves.
- Buy the first close above the upper band within 5 bars of a squeeze — the compression resolving upward with force. A band break without a fresh squeeze is ignored.
- Sell when the close falls back below the middle band — the expansion has run its course.
Worked example. The bands narrow to 98.5–101.5 around a middle of 100 — a width of 3%, the lowest in 125 bars, so the squeeze is on. Two bars later price closes at 101.8, above the upper band — buy. The released move runs for weeks; when a close at 106.1 finally slips under the risen middle band at 106.5, the trade exits.
The Math Behind The Indicators
Everything runs on closing prices of the traded timeframe: P is a close, Pt today's close, and N counts bars — one bar is one candle of that timeframe, so 20 bars on a 1h chart is 20 hours.
- Simple Moving Average (SMA)
- The plain average of the last N closing prices: add them up, divide by N. It smooths out bar-to-bar noise so the underlying direction is easier to see — a rising SMA means recent prices sit above where they used to be.
- Example: With N = 3 and closes 100, 102, 104 the SMA is (100 + 102 + 104) / 3 = 102.
- Bollinger Bands
- A 20-bar SMA with an envelope two standard deviations above and below it. The standard deviation σ measures how far closes have recently strayed from their average, so the bands widen when the market is choppy and tighten when it is calm — a close outside a band is a statistically unusual move.
- Example: If the last 20 closes average 100 and typically stray about 1.5 from it (σ = 1.5), the bands sit at 100 ± 3, i.e. 97 and 103. A close at 96.5 is below the lower band — unusually cheap relative to the recent range.