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Bollinger Bands

Difficulty beginner

Definition

Bollinger Bands are volatility bands placed above and below a moving average. The distance is determined by standard deviation.

price                                                                   
  │                                          ●←──── breakout (rare)     
  │                                        ╱                            
  │ ─ ─ ─ ─ ─ ─ ─ ─ ─ ─ ─ ─ ─ ─ ─ ─ ─ ─ ─╱─ ─ ─ ─ ─ ─ ─  upper band (+2σ)
  │                       ●            ╱╲    sell zone                  
  │                     ╱   ╲        ╱    ╲                             
  │            ●      ╱       ╲    ╱        ╲                           
  │          ╱   ╲  ╱           ╳            ╲                          
  │ ─ ─ ─  ╱ ─ ─ ─╳─ ─ ─ ─ ─ ─╱─ ╲─ ─ ─ ─ ─ ─ ╲ ─ ─ ─  middle (SMA 20) 
  │       ╱     ╱   ╲       ╱      ╲           ╲                        
  │     ╱     ╱       ╲   ╱          ╲           ╲                      
  │   ╱     ╱           ●              ╲           ╲                    
  │ ─ ─ ─ ╱─ ─ ─ ─ ─ ─ ─ ─ ─ ─ ─ ─ ─ ─ ╲─ ─ ─ ─ ─ ─╲ ─ ─  lower band (−2σ)
  │     ╱              buy zone          ╲           ●                  
  │   ╱                                                                 
  └──────────────────────────────────────────────────────→ time         

  squeeze (bands contract)  →  low volatility  →  breakout often follows
  expansion (bands widen)   →  high volatility →  trend in motion

Calculation

Middle Band = SMA(n)  (typically 20)
Upper Band = SMA(n) + k × σ(n)  (typically k=2)
Lower Band = SMA(n) - k × σ(n)

%B = (Price - Lower) / (Upper - Lower)
Bandwidth = (Upper - Lower) / Middle

where: SMA(n) simple moving average of close over n periods · σ(n) rolling standard deviation of close over the same window · k band-width multiplier in standard deviations · Price current close · %B position of price inside the band, 0 at the lower band and 1 at the upper · Bandwidth band width normalized by the mean. does: wraps a moving average in volatility-scaled envelopes so the bands widen during turbulent regimes and contract during quiet ones. Mean-reversion traders fade touches of the outer bands back to the middle; trend traders read sustained "walks along the upper band" as confirmation of strength. A Bandwidth collapse (squeeze) flags compressed volatility and warns that a directional expansion is likely imminent — direction is decided by the breakout, not the squeeze itself.

Trading Signals

Mean Reversion

Buy: Price touches lower band and shows reversal signs Sell: Price touches upper band and shows reversal signs Stop: Beyond the band

Trend Following

Buy: Price rides upper band (strong uptrend) Sell: Price rides lower band (strong downtrend)

Bollinger Squeeze

Low Bandwidth → Low volatility → Expect breakout

%B Interpretation

%B Value Interpretation
> 1.0 Above upper band
0.8-1.0 Near upper band
0.5 At middle band (SMA)
0.0-0.2 Near lower band
< 0.0 Below lower band

Double Bottom/Top with Bands

W-Bottom: Price makes two lows, second low touches lower band but doesn't break it → bullish

Practical Guidelines

  1. Bands Expand and Contract — Volatility is cyclical
  2. Squeeze Precedes Move — Narrow bands = big move coming
  3. Direction Unknown — Squeeze doesn't indicate direction
  4. Walking the Bands — Not a reversal signal in strong trends
  5. Combine with Other Indicators — RSI, volume for confirmation

Next Steps