What are Bollinger Bands?
Developed by John Bollinger in the 1980s, Bollinger Bands add dynamic channels above and below a moving average based on price volatility (measured by standard deviation):
- Middle Band: 20-day Simple Moving Average
- Upper Band: 20-day SMA + 2 standard deviations
- Lower Band: 20-day SMA − 2 standard deviations
When the stock is volatile, the bands widen. When it's quiet and consolidating, they narrow. This makes Bollinger Bands self-adjusting to market conditions — unlike fixed-percentage channels that become irrelevant in high or low volatility periods.
The key insight: bands measure relative price extremes
Since roughly 95% of price data falls within 2 standard deviations of the mean (under a normal distribution), a price touching the upper band is statistically unusual — but not impossible, and not automatically a sell signal.
In a strong trend, stocks can "walk the upper band" — repeatedly touching or slightly exceeding it while continuing to trend higher. This walking behaviour is actually a bullish sign, not a reversal warning. The mistake most beginners make: selling every time price hits the upper band in an uptrend.
The Bollinger Band squeeze: the setup traders wait for
When the bands contract significantly — narrowing to historically tight levels — it signals a period of very low volatility. Markets cycle between volatility expansion and contraction. A sustained squeeze is coiling energy that typically precedes a sharp breakout.
The squeeze itself doesn't tell you direction — that comes from the breakout. Confirmation signals for the breakout direction:
- Volume spike in the direction of the move
- Price closes outside the band (not just touches it)
- Underlying trend and fundamentals support the direction
Bandwidth: measuring volatility expansion
Bollinger Bandwidth = (Upper Band − Lower Band) ÷ Middle Band. Plotting this over time makes squeezes and expansions easy to spot historically. Extremely low bandwidth readings are the objective measure of a squeeze in progress.
Key takeaways
- Bollinger Bands = moving average ± 2 standard deviations. Widen in volatility, narrow in calm.
- Price touching the upper/lower band is not a reversal signal — in trends, it's confirmation.
- A Bollinger squeeze (narrow bands) signals impending volatility expansion — watch for the breakout direction.
- Combine with volume and trend direction for reliable signals; avoid using bands in isolation.