3) Technical Analysis

What is Bollinger Bands

Stock prices are like a rubber band — stretch it too far and it snaps back. Bollinger Bands help you see when the rubber band has been 'pulled too tight' and is about to spring back.

Definition

Bollinger Bands is a volatility indicator consisting of three lines: a middle line (20 Moving Average), an upper band (MA + 2 standard deviations), and a lower band (MA - 2 standard deviations). The bands widen during high volatility and narrow during low volatility.

Simple Explanation (Analogy)

Imagine Bollinger Bands as a rubber band wrapped around price movement. When price touches the upper band, the rubber band is stretched to its max upward — it'll likely snap back down. When price touches the lower band, it's pulled down — get ready for a bounce up. And when the bands narrow like an unstretched rubber band? A big 'storm' is coming — price is about to make a big move!

Indonesian Stock Example

Interesting example: when TLKM's Bollinger Bands narrowed drastically for several weeks (squeeze), experienced traders got ready because they knew a big move was coming. Sure enough, after the squeeze, TLKM broke out with a significant rally. On the flip side, when UNVR repeatedly touched the upper Bollinger Band but failed to hold, it signaled that bullish momentum was exhausted.

How to Use

Add Bollinger Bands to your chart (standard settings: 20 MA, 2 standard deviations). Watch where price is relative to the three lines.
When price touches or breaks below the lower band, it could be a buying opportunity — but confirm with volume and candlestick reversal patterns. When touching the upper band, be cautious about taking profit.
Watch for the Bollinger Squeeze (bands narrowing). This signals low volatility usually followed by a big price move. Prepare a strategy to follow the breakout direction.

Common Mistakes

Automatically buying when price touches the lower band. In a strong downtrend, price can 'walk the band' along the lower band and keep dropping.
Ignoring the squeeze. Many beginners miss squeeze signals, which are actually one of the most profitable Bollinger Bands setups.
Using Bollinger Bands alone without volume confirmation. Bands only show volatility boundaries, not definite direction.

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FAQ

Why do Bollinger Bands use 2 standard deviations?

Statistically, 2 standard deviations cover about 95% of price data. This means price is outside the bands only 5% of the time — so when price breaches a band, it's a fairly rare event worth paying attention to.

Can I change the Bollinger Bands settings?

Yes. Some traders use 1.5 standard deviations for more sensitive signals or 2.5 for more conservative ones. But the default settings (20, 2) are well-tested and work fine in most market conditions.