Bollinger Bands

Bollinger Bands are a volatility envelope placed above and below a moving average. They expand when volatility increases and contract when it decreases. The key insight: periods of low volatility (squeezes) are often followed by sharp directional moves (expansions). Engulfy uses Bollinger Bandwidth — the distance between the bands — to detect squeezes as watchlist setups and expansion breakouts as actionable signals.

Bollinger Bands chart showing squeeze (narrow bands) followed by expansion breakout (wide bands with price breaking above upper band)

What Are Bollinger Bands?

Bollinger Bands were created by John Bollinger in the 1980s. They consist of three lines:

Middle Band: A 20-period Simple Moving Average (SMA).
Upper Band: Middle Band + 2 standard deviations.
Lower Band: Middle Band − 2 standard deviations.

The bands automatically widen when price becomes more volatile and narrow when price becomes calmer. This adaptive quality is what makes them useful — they respond to the market rather than using fixed levels.

Bollinger Bandwidth

Bandwidth measures the distance between the upper and lower bands relative to the middle band. It quantifies how "wide" or "narrow" the bands are:

Bandwidth = (Upper Band − Lower Band) / Middle Band = (4 × StdDev) / SMA(20)

Engulfy then computes the percentile rank of the current bandwidth against recent historical data and inverts it so that a higher percentile means a tighter squeeze — just as a high IQ percentile means a stronger score.

The Squeeze

A squeeze occurs when Bollinger Bandwidth falls to an unusually low percentile relative to its historical range. This means volatility has compressed significantly — the market is coiling like a spring.

Squeezes are setups, not triggers. They tell you something is likely to happen soon, but not which direction. That's why Engulfy surfaces them on the Squeeze Watchlist rather than as actionable signals. The watchlist shows how long each ticker has been in a squeeze (using "Time in Squeeze"), so you can monitor these setups as they develop.

The tighter the squeeze (higher percentile), the stronger the setup. A 99th percentile squeeze means bandwidth is narrower than 99% of recent history — an exceptionally rare compression.

Expansion Breakout

An expansion breakout occurs when a squeeze resolves into a directional move. This is the actionable signal — it means the coiled spring has released. Engulfy detects this by looking for three key conditions:

Recent squeeze: Bandwidth was recently at a compressed level.
Bandwidth expanding: Bandwidth is actively increasing, showing the squeeze is resolving.
Breakout: The close price is above the upper band (bullish) or below the lower band (bearish).

Expansion breakouts that follow deeper squeezes or show faster bandwidth expansion are scored with higher strength.

How Engulfy Detects the Bollinger Bandwidth

Engulfy computes a 20-period SMA and 2σ bands for each bar, then derives the Bandwidth value.
The percentile rank of the latest bandwidth is computed against trailing historical data to gauge how compressed the bands are.
Squeeze detection fires when bandwidth drops to an unusually low percentile (displayed inverted — higher = tighter). Tighter squeezes receive higher strength scores.
Expansion detection looks for a recent squeeze followed by bandwidth expansion and a close outside the bands (above upper for bullish, below lower for bearish).
Deeper squeezes and faster expansion rates contribute to higher signal strength.
Squeeze signals appear on the Squeeze Watchlist (not the main signals panel). Expansion Breakout signals appear as actionable signals alongside other indicator signals.
When a ticker is in a squeeze, candle pattern signals receive a strength boost — volatility compression amplifies the significance of price patterns.

Parameters: SMA period = 20, band multiplier = 2σ — standard Bollinger Band settings. Detection runs on all timeframes (daily, weekly, monthly, quarterly) for stocks and crypto.

The Squeeze Watchlist

The Squeeze Watchlist on the Engulfy dashboard shows all tickers currently in a squeeze, sorted by how long they've been compressed (longest first). Each entry shows:

Ticker: The symbol — click to view the ticker detail page.
Display text: Shows the current bandwidth and squeeze percentile (e.g. "Squeeze (BW 3.1%, 98th %ile)"). Higher percentile = tighter squeeze.
Time in Squeeze: How long the squeeze has been active (e.g. "2d", "1w"). Longer squeezes often lead to larger moves.
Timeframe: Daily, Weekly, Monthly, or Quarterly.
Strength dots: How extreme the squeeze is (more dots = tighter compression).

Combining with Other Signals

Bollinger Bandwidth works best as a context layer alongside other indicators:

Candle patterns during a squeeze: A bullish engulfing candle while in a squeeze is more significant than usual — Engulfy automatically boosts the strength of strong candle patterns during squeezes.
StochRSI crossovers: A momentum shift (StochRSI cross) during or just after a squeeze can help confirm the breakout direction.
Support/resistance levels: A squeeze near a major S/R level is particularly noteworthy — the breakout direction often determines whether the level holds or breaks.
Moving average alignment: If moving averages are bullishly aligned and a squeeze resolves upward, the probability of a sustained move increases.

Limitations

Squeezes don't predict direction: A squeeze tells you volatility is compressed, but not which way price will break. The expansion signal fires only after the breakout direction is confirmed.
False breakouts: Price can briefly pierce a band and reverse. Not every expansion leads to a sustained trend. Combining with other indicators reduces this risk.
Lookback sensitivity: The 252-bar lookback works well for daily timeframes but may be limited for monthly or quarterly bars where fewer data points are available.
Low-volatility regimes: In extended low-volatility environments, many tickers may show squeezes simultaneously, diluting the signal's value as a differentiator.

Reference: John Bollinger, Bollinger on Bollinger Bands (2001) — the definitive source for Bollinger Band theory and applications.