Your toolkit so far: EMA for direction, RSI for overextension, MACD for momentum. This article adds two more: Bollinger Bands measure how wild or calm a stock is, and volume tells you whether a move is real.
What are Bollinger Bands?
Bollinger Bands are three lines drawn on the price:
- A middle line, which is just a 20-day moving average (the mean of the last 20 closes).
- An upper band and a lower band, placed a certain distance above and below that middle line.
The clever part is how far the bands sit from the middle. They are placed at 2 standard deviations, which sounds scary but has a simple picture.
Standard deviation is just how far the price usually wanders from its average, like a dog on a leash around its owner. A calm dog stays close (short leash, tight bands). An excited dog strains in every direction (long leash, wide bands). Bollinger draws the bands at about twice that usual wandering distance, so price stays inside them about 95% of the time.
So the bands breathe. Think of lungs: wild market, the bands inflate; calm market, they deflate and hug the price. Because price stays inside about 95% of the time, riding the upper band means "high for this stock lately" and the lower band means "low for this stock lately," a bit like RSI but drawn right on the price.
A quick number makes the breathing concrete. Say NABIL's 20-day average is 1,000. In a normal stretch the price usually wanders about 25 rupees either side of that average, so the bands sit two wanders out, at 1,050 and 950. Then the stock goes quiet and the usual wander shrinks to 10, so the bands pull in to 1,020 and 980. Same average, far tighter bands. That tightening is the squeeze.
The squeeze: a coiled spring
Here is the signal that makes Bollinger Bands famous.
You find a NEPSE stock that has gone completely quiet, tiny daily moves, and its Bollinger Bands have squeezed in really tight. Boring. Why might that boring stock actually be one of the most interesting to watch?
Reveal the answer
Because volatility is cyclical, and quiet never lasts. A long stretch of calm coils up energy that eventually releases as a big move. The squeeze tells you a move is coming, just not the direction, so you pair it with trend and momentum to guess which way.
A tight squeeze is a coiled spring: the tighter it winds, the bigger the eventual snap. Tap New scenario below and watch the bands squeeze during the calm and then bulge wide when the breakout fires:
Normal. Bands are at a normal width. No strong signal from volatility alone.
Tap New scenario. Watch the bands breathe: they squeeze tight when the stock is calm, then bulge wide after a breakout. A squeeze is a coiled spring. Illustrative data, not live NEPSE prices.
Two cautions so you do not misuse the bands:
- Touching the upper band is not an automatic sell, and the lower band is not an automatic buy. Same trap as RSI.
- In a strong trend price can walk the band, riding the upper band higher for many days. The band touch alone is not a signal.
Why volume matters
The other tool in this article is the simplest one in the whole series. Volume is just how many shares changed hands. It answers a question none of the other indicators can: is this move actually backed by people, or is it fake?
NABIL breaks out to a fresh high on two different days. On day A, a huge number of shares traded, far more than usual. On day B, barely any shares traded. Which breakout do you trust more, and why?
Reveal the answer
Day A. Heavy volume means real participation, a crowd voting with their money, so the move is believable. Day B's breakout happened on almost no trading, which means almost nobody actually agrees with it, so it often fails.
The analogy: volume is the size of the crowd. A big move on heavy volume is a roaring stadium, the move is real. The same move on thin volume is a shout in an empty room. Here is the same breakout with and without a crowd:
This is why volume is the lie-detector for every other signal. A Bollinger breakout, a MACD crossover, an RSI bounce: all of them are more trustworthy when volume confirms them, and suspect when volume is thin.
How to use them together
- Watch for a squeeze (tight bands) to warn that a big move is brewing.
- When price breaks out of the squeeze, check volume. Heavy volume confirms the breakout; thin volume warns it may be fake.
- Use the trend (EMA) and momentum (MACD, RSI) to judge the likely direction of the break.
- Never treat a band touch as a buy or sell on its own.
Key takeaways
- Bollinger Bands are a 20-day average with bands at 2 standard deviations, so they measure volatility: wide when wild, tight when calm.
- A squeeze is a coiled spring. Calm coils energy, and a big move usually follows, though the bands alone do not give direction.
- Volume is the size of the crowd. A move on heavy volume is trustworthy; on thin volume it is suspect.
- Bands and volume are confirmation tools. Combine them with trend and momentum, never use a band touch alone.
Common questions
What are Bollinger Bands in simple terms? A moving average with two elastic bands that widen when the stock is volatile and squeeze when it is calm.
What is a squeeze? When the bands go tight because the stock is quiet. A big move often follows.
Why does volume matter? It shows how many people are behind a move. Heavy volume makes a breakout believable; thin volume makes it suspect.
You now have all five tools: trend, momentum, overextension, volatility, and volume. In the final article we put them together to research a real NEPSE stock from scratch.
Educational content only. This is not investment advice. Prices shown are illustrative, not live NEPSE data.