Volatility Squeeze

Bollinger Bands are a great way to identify volatility squeezes. Most charting programs support this option, and I recommend looking into it if you are unfamiliar with this popular indicator. One thing Bollinger Bands are good for is identifying volatility squeezes. The following example exemplifies this technical reading (note: I have hidden the stock's identity, including the price scale, since I own it and prefer not to deal with disclosure).


When price becomes range-bound, the bands tighten in around the price. The longer the duration, the tighter the bands. This leaves little room for price movement within the bands. When the price does move outside the bands, which it must do eventually, it is a pretty reliable indicator of the start of a new trend. That trend could be either up or down. The pictured stock is now in a very tight volatility squeeze, where there is almost no room for price volatility within the Bollinger Bands.

There was a less-prominent squeeze in this stock earlier in the year, and it broke out in spectacular fashion in early May. Over time the stock price did decline, but still kept well above the range of that squeeze.

It is impossible to tell when the next breakout will occur, but considering how tight the squeeze is this time, the move could be even more substantial. While I currently hold this stock, the better way to play a volatility squeeze is to wait for the price to move above or below the Bollinger Bands and then go long or short, respectively. This strategy is not guaranteed to work so you ought to protect yourself with stop losses. You might also want to confirm that the move isn't likely to reverse by waiting a day or two, or at least for a closing quote that is beyond the range. Waiting does remove a portion of the potential profit, but the insurance it provides may be worth it. Just don't wait too long to jump in or you risk missing the move entirely.