What is Bollinger Bands?

Bollinger Bands are a volatility indicator created by John Bollinger in the 1980s. They consist of three lines: a middle band (typically a 20-period simple moving average), an upper band set two standard deviations above the middle band, and a lower band set two standard deviations below. The bands automatically widen when volatility increases and narrow when volatility decreases, providing a dynamic envelope around the price.

The primary use of Bollinger Bands is to identify whether a stock's price is relatively high or low. When the price touches or exceeds the upper band, the stock may be considered overbought, and when it touches or falls below the lower band, it may be considered oversold. However, these are not automatic buy or sell signals. In strong trends, prices can ride along the upper or lower band for extended periods, a phenomenon known as walking the bands.

One of the most powerful Bollinger Band signals is the squeeze, which occurs when the bands narrow significantly, indicating a period of low volatility. Low volatility often precedes a sharp price move in one direction, though the bands themselves do not predict which direction the breakout will go. Traders watch for the price to break above or below the bands after a squeeze for a directional signal.

Bollinger Bands are often used in conjunction with other indicators for confirmation. For example, a trader might look for the price to touch the lower Bollinger Band while RSI is below 30 to identify a high-probability oversold bounce. The %B indicator, which shows where the price falls within the bands on a 0-to-1 scale, and Bandwidth, which measures the width of the bands, provide additional analytical dimensions.

Cannabis stocks tend to exhibit higher volatility than the broader market, which has important implications for using bollinger bands as a trading tool. Standard parameter settings that work well for large-cap stocks may need adjustment for cannabis names, where daily price swings of 5-10% are not uncommon. Traders may want to use wider bands, longer periods, or more conservative signal thresholds when applying this indicator to cannabis charts.

The cannabis sector is also prone to sharp, news-driven moves triggered by regulatory announcements, earnings surprises, or industry-wide catalysts. These sudden moves can overwhelm technical signals, causing indicators like bollinger bands to give false or delayed readings. Combining technical analysis with awareness of the cannabis regulatory calendar and earnings schedule helps traders avoid being caught off guard by fundamental catalysts that override technical patterns.