Most price action occurs within the upper and lower bands, so when price hits either line, the market is reaching an extreme. As with most technical indicators, Bollinger Bands are interpreted in different ways. Traditionally, traders have viewed Bollinger Bands as relative overbought or oversold levels and potential reversal points. Others interpret price touching or penetrating one of the bands as a sign of strong momentum and an indication a new trend has been confirmed and should be followed. Which scenario is more likely?

To answer this question, this study summarizes and updates results from a recent academic paper that tested Bollinger Band strategies. It analyzes two interpretations of Bollinger Bands on daily prices on the S&P 500 index (SPX), Dow Jones Industrial Average (DJIA), and Nasdaq Composite (COMP) over the past 10 years. It then focuses on two distinct periods — the technology bubble’s arc from 1999 to 2002 and the recent financial meltdown from late 2007 to early 2009. In such crisis periods, one Bollinger Band approach worked better than the other.