Bollinger Bands
Bands plotted two standard deviations above and below a 20-period moving average, expanding in volatile markets and contracting in quiet ones.
Description
Bollinger Bands were developed by John Bollinger in the early 1980s. The indicator plots three lines: a middle band (20-period simple moving average) and upper and lower bands at two standard deviations from the middle. Because they use standard deviation, the bands widen when volatility is high and contract when volatility is low.
How It Works
Middle Band = 20-period SMA. Upper Band = 20-SMA + 2 × standard deviation of closes over 20 periods. Lower Band = 20-SMA − 2 × standard deviation. Under normal distribution, approximately 95% of price action should fall within the bands. Bollinger intentionally avoided fixed values for the bands — their dynamic nature is the key feature.
How to Read It
Bands widening signals increasing volatility; contracting bands (“squeeze”) signal a calm period that often precedes a sharp move. During a strong uptrend, price can “walk the upper band” — repeatedly touching or exceeding it without it being a sell signal. At reversal points, a price touching the lower band while RSI diverges is a potential long setup. “M-top” and “W-bottom” patterns within the bands are Bollinger’s own reversal setups.
Common Uses
- Volatility measurement and regime identification
- “Squeeze” as a pre-breakout alert
- Dynamic support and resistance levels
- Identifying overextended moves for mean-reversion setups
Caveats
The most common misconception about Bollinger Bands is that touching the upper band is a sell signal and touching the lower band is a buy signal. In trending markets this interpretation produces consistent losses. Bollinger himself is explicit: the bands are a framework for analysis, not a standalone mechanical system. The default 20/2 settings suit most instruments on daily charts but may need adjustment for other timeframes.