Bollinger Bands
Bollinger Bands
Bollinger Bands, developed by John Bollinger, are a volatility indicator consisting of a middle moving average and two outer bands that expand and contract based on market volatility.
How It Works
The middle band is a 20-period SMA. The upper and lower bands are placed 2 standard deviations away. When volatility increases, bands widen; when volatility drops, they squeeze together.
Formula
Middle Band = SMA(20) Upper Band = SMA(20) + 2 × Standard Deviation Lower Band = SMA(20) - 2 × Standard Deviation
Signal Interpretation
Bands narrow significantly — signals low volatility and often precedes a large breakout in either direction.
Price touches or closes above the upper band — potential overbought condition or continuation of strong trend.
Price touches or closes below the lower band — potential oversold condition or mean reversion opportunity.
Price breaks convincingly outside the bands after a squeeze — strong directional move likely.
Use Cases
- ▸Identifying high and low volatility environments
- ▸Finding mean reversion opportunities
- ▸Detecting breakouts after consolidation periods
- ▸Setting dynamic support and resistance levels
Limitations
- ⚠Does not indicate direction — only volatility
- ⚠Price can walk along the bands in strong trends
- ⚠Requires additional indicators for direction confirmation
The Bollinger Band squeeze is one of the most powerful patterns. When bands are the narrowest in 6 months and price breaks out, it often leads to significant moves.