Bollinger Bands

Bollinger Bands are a volatility indicator created by John Bollinger in the 1980s. They consist of a moving average in the middle with an upper and lower band set a number of standard deviations away. Because standard deviation rises and falls with volatility, the bands widen when markets are volatile and tighten when they are calm. They show at a glance whether price is high or low relative to its recent behaviour.

The formula#

Middle band = 20 period SMA of the close
Upper band = Middle band + 2 × standard deviation (20 periods)
Lower band = Middle band − 2 × standard deviation (20 periods)

The default settings are 20 periods and 2 standard deviations. Under a normal distribution, about 95% of values would fall within two standard deviations, but market prices are not normally distributed, so price closes outside the bands more often than that suggests. See Fat Tails.

Reading Bollinger Bands#

The squeeze#

When the bands contract to their narrowest width in months, volatility is unusually low. Bollinger called this the squeeze. Low volatility rarely lasts, so a squeeze often comes before a strong breakout, though it does not tell you the direction. Traders mark the squeeze and wait for price to close outside the bands with rising volume. See Compression and Expansion.

Walking the bands#

In strong trends, price can repeatedly touch or close outside the upper band (in uptrends) or lower band (in downtrends). This is called walking the bands and shows strength, not exhaustion. Selling every upper band touch in an uptrend is one of the most common Bollinger Band mistakes.

Mean reversion in ranges#

In sideways markets, the bands act like dynamic boundaries. Traders buy when price touches the lower band and shows a reversal sign, targeting the middle or upper band, and sell near the upper band. This works best when the bands are flat rather than expanding. See Mean Reversion.

%B and bandwidth#

Two related indicators make the bands easier to quantify:

%B = (Close − Lower band) ÷ (Upper band − Lower band)
Bandwidth = (Upper band − Lower band) ÷ Middle band

A %B of 1 means price is at the upper band, 0 at the lower band, above 1 outside the upper band. Bandwidth measures how wide the bands are, making squeezes easy to spot.

Settings#

• 20 and 2: the standard for most timeframes.
• Shorter periods (10) with 1.5 standard deviations: for short term trading.
• Longer periods (50) with 2.5 standard deviations: for longer term analysis.

Combining with other tools#

• Keltner Channels: when Bollinger Bands contract inside Keltner Channels, many traders call it a squeeze. See Keltner Channels.
• RSI: a lower band touch with bullish RSI divergence strengthens a reversal setup. See RSI (Relative Strength Index).
• Volume: a band breakout on high volume is more convincing.

Common mistakes#

• Treating band touches as automatic reversal signals.
• Fading strong trends that walk the bands.
• Assuming the squeeze predicts direction.

Frequently asked questions#

What do Bollinger Bands tell you?#

How high or low price is relative to its recent average and volatility, and whether volatility is expanding or contracting.

Is touching the upper Bollinger Band a sell signal?#

Not by itself. In strong uptrends, price often walks along the upper band. It is more meaningful in ranges.

What is a Bollinger Band squeeze?#

A period when the bands become very narrow, signalling low volatility that often precedes a large move.

Sources#

• Wikipedia, Bollinger Bands