Bollinger Bands strategy: trading the squeeze, with a free Pine Script

How Bollinger Bands work

John Bollinger developed the bands in the 1980s. There are three lines: a 20-period simple moving average in the middle, and two bands set 2 standard deviations above and below it. The standard deviation measures how spread out recent closes are, so the bands widen when prices swing a lot and narrow when they don't.

Most closes fall inside the bands, which is why beginners often sell at the upper band and buy at the lower one. Bollinger himself stressed that a touch of a band isn't a buy or sell signal on its own. In a strong trend, the price can ride along the upper band for a long time. The bands are better at telling you how volatile the market is than which way it will go.

The squeeze

Volatility comes in cycles: quiet periods tend to be followed by busy ones, and the other way round. When the bands pinch together more than they have for a long time, the market is unusually quiet, and a big move often follows. Bollinger called this the squeeze. He measured it with band width: the distance between the bands divided by the middle band. He described a squeeze as band width falling to its lowest level in about six months. This script uses 100 candles, which on the 1-hour chart is only about four trading days, a much looser test than Bollinger's six months; try a longer lookback to see how many fewer squeezes it finds.

The squeeze tells you a move may be coming, not which way. That's why the strategy waits for the price to break out of the bands before choosing a side. Bollinger also warned about the head fake: a first move out of the squeeze that reverses and becomes the real move the other way. The stop at the middle band is there for that.

The rules, step by step

1. Find the squeeze

The script works out the band width on every candle. When it's the lowest of the last 100 candles, that's a squeeze, and the background is shaded.

2. Wait for the first close outside a band

Within 5 candles of a squeeze, go long on a close above the upper band, or short on a close below the lower band, when the candle before closed inside the bands. If a first breakout fails and the price closes back outside again within the window, the script can take a second trade.

3. Stop at the middle band

The stop goes at the middle band (the 20 SMA) as it is when you enter. If the price falls back to the average, the breakout has failed. The other choice is the opposite band, which gives more room and a smaller position.

4. Target twice the risk

The target is 2R. The trend filter is off by default, because a squeeze can break either way; switch it on to take only breakouts in the direction of the 200 EMA.

Worked example: GBPUSD, 1-hour chart

After a choppy week, GBPUSD goes quiet around 1.3190. The band width falls to 0.23% of the price, the lowest in 100 candles (it had been as wide as 0.87%). Two candles after the squeeze, a strong candle closes at 1.3210, above the upper band at 1.3209. That's the long signal, with the stop at the middle band, 1.3191.

The bands open up as the move gets going, and the target is reached 8 hours after the entry. The quiet stretch is what made the stop small: the middle band was only 19 pips below the breakout close. After a busy period the same setup would need a much wider stop.

Other ways traders use Bollinger Bands

For momentum without the bands, see the RSI 60/40 strategy; for a trend filter with moving averages, the 9 and 21 EMA crossover.

Risk management

• Expect head fakes. Some breakouts reverse straight back through the middle band. Small, fixed risk per trade is what keeps them from mattering.
• Size from the band. The middle band can be close or far depending on how quiet the squeeze was.
• Check the calendar. Squeezes often end on news. A breakout on a data release can be violent; see the economic calendar.

Common mistakes

1. Selling every touch of the upper band. In a trend that means fighting the move.
2. Guessing the direction before the break. The squeeze doesn't tell you which way.
3. Calling any narrow stretch a squeeze. The point is that it's the narrowest in a long time; compare it with the last 100 candles, not the last 10.
4. Changing the settings to fit one chart. 20 and 2 are the standard. Test changes on many dates.

Backtest it yourself on TradingView

This page doesn't quote a win rate or a profit figure, and you should be wary of anyone who does without showing the test. Results change with the market, the dates, the data feed and the costs you put in. The honest way is to run the test yourself, and the free script below does the work in a couple of minutes.

1. Open the chart. On TradingView, open GBPUSD on the 1-hour chart.
2. Add the script. Open the Pine Editor from the Pine icon in the panel on the right of the chart (older layouts have it as a tab under the chart), delete the code that's already there, paste this strategy's code and click "Add to chart".
3. Put in your costs. Open the strategy's settings and go to Properties. Enter your broker's commission and a little slippage. A test without costs flatters every strategy, and short-term ones most of all.
4. Read the Strategy Tester. The panel under the chart shows the net profit, the maximum drawdown, the profit factor, the number of trades and a list of every trade. Click a few trades and check on the chart that each one follows the rules. Trade sizes are shown in units rather than lots: 100,000 units is one lot of a forex pair, and 100 ounces is one lot of gold.
5. Change one setting at a time. Compare the middle-band stop with the opposite-band stop, the squeeze lookback (50, 100, 150 candles), the 5-candle window, and the 200 EMA filter on and off. Then try EURUSD, XAUUSD and the 15-minute chart.

As a rough guide, don't trust a result with fewer than 100 trades, a profit factor under 1 once costs are in, or a drawdown you couldn't sit through with real money. Settings tuned to look good on one stretch of history often fail on the next, so check the same settings on dates you didn't tune them on, then demo trade the strategy for a few weeks. How much history you can test depends on your TradingView plan: the free plan loads 5,000 candles, which is a few months of 15-minute candles but years of daily ones.

The script sizes each trade from the stop loss and your risk percentage, starts with $10,000 and assumes 1:100 leverage (a 1% margin setting), so the tester doesn't flag margin calls on normal forex trade sizes. Change these under Properties to match your account. By default TradingView fills orders at the open of the candle after the signal, so the fill can differ a little from the signal candle's close.

Download the free Pine Script and PDF

//@version=6
// Bollinger Bands squeeze strategy by PipLedger (https://pipledgerfx.com/bollinger-bands-strategy)
// Waits for the bands to squeeze to their narrowest in 100 candles, then trades the first close outside a band.
// Free to use and change. For education and backtesting only; not financial advice.
strategy("PipLedger: Bollinger Bands Squeeze", shorttitle="BB Squeeze", overlay=true, initial_capital=10000, pyramiding=0, default_qty_type=strategy.fixed, default_qty_value=1, margin_long=1, margin_short=1, currency=currency.USD)

// ---------- Inputs
bbLen     = input.int(20, "Bollinger length", minval=2)
bbMult    = input.float(2.0, "Standard deviations", minval=0.5, step=0.1)
sqLook    = input.int(100, "Squeeze: band width at its lowest in (candles)", minval=10)
sqRecent  = input.int(5, "Breakout must come within (candles) of the squeeze", minval=1)
stopMode  = input.string("Middle band", "Stop loss at", options=["Middle band", "Opposite band"])
rr        = input.float(2.0, "Target (R multiple)", minval=0.5, step=0.25)
useTrend  = input.bool(false, "Only trade in the direction of the 200 EMA")
riskPct   = input.float(1.0, "Risk per trade (% of equity)", minval=0.1, maxval=5.0, step=0.1)

// ---------- Helpers
fx = strategy.convert_to_account(1.0)  // one unit of the chart's quote currency in account currency (1 on USD-quoted charts)
calcQty(float entry, float stop) =>
    float dist = math.abs(entry - stop)
    dist > 0 and not na(fx) ? strategy.equity * riskPct / 100 / (dist * syminfo.pointvalue * fx) : 0.0

basis  = ta.sma(close, bbLen)
dev    = bbMult * ta.stdev(close, bbLen)
upper  = basis + dev
lower  = basis - dev
bw     = (upper - lower) / basis          // band width as a share of the middle band
ema200 = ta.ema(close, 200)

squeeze  = bw <= ta.lowest(bw, sqLook)
sinceSq  = ta.barssince(squeeze)
recentSq = not na(sinceSq) and sinceSq <= sqRecent

// ---------- Signals: the first close outside a band soon after a squeeze
flat     = strategy.position_size == 0
longSig  = flat and recentSq and close > upper and close[1] <= upper[1] and (not useTrend or close > ema200)
shortSig = flat and recentSq and close < lower and close[1] >= lower[1] and (not useTrend or close < ema200)

if longSig
    float sl = stopMode == "Middle band" ? basis : lower
    float q  = calcQty(close, sl)
    if q > 0 and sl < close
        strategy.entry("Long", strategy.long, qty=q)
        strategy.exit("Long exit", "Long", stop=sl, limit=close + (close - sl) * rr)

if shortSig
    float sl = stopMode == "Middle band" ? basis : upper
    float q  = calcQty(close, sl)
    if q > 0 and sl > close
        strategy.entry("Short", strategy.short, qty=q)
        strategy.exit("Short exit", "Short", stop=sl, limit=close - (sl - close) * rr)

// ---------- Chart
pU = plot(upper, "Upper band", color=color.new(color.teal, 20))
plot(basis, "Middle band (20 SMA)", color=color.new(color.orange, 0))
pL = plot(lower, "Lower band", color=color.new(color.teal, 20))
fill(pU, pL, color=color.new(color.teal, 92), title="Bands")
bgcolor(squeeze ? color.new(color.orange, 85) : na, title="Squeeze")
plot(useTrend ? ema200 : na, "200 EMA", color=color.new(color.gray, 0))
plotshape(longSig, "Breakout up", shape.triangleup, location.belowbar, color.teal, size=size.small)
plotshape(shortSig, "Breakout down", shape.triangledown, location.abovebar, color.red, size=size.small)

Trading this from India

Residents can trade EURUSD, GBPUSD and USDJPY futures and options on NSE and BSE through a SEBI-registered broker. The contracts are quoted the same way as the spot pair, one lot is 1,000 units of the base currency, and they're cash-settled in rupees. They trade only from 9 a.m. to 7:30 p.m. IST, volumes are thin and not every broker offers them, so check the hours and the spread first. Trading forex or CFDs with offshore online platforms isn't allowed for residents under FEMA, even if the app is easy to download. Details are in is forex trading legal in India.

Related strategies: 9 and 21 EMA crossover, RSI 60/40, MACD and 200 EMA, VWAP pullback, XAUUSD scalping. All 34 strategies are compared on one page in forex trading strategies.