Bollinger Bands
How Bollinger Bands measure volatility and how traders interpret price relative to the bands.
⏱️ ~6 min read
Key Takeaways
- Bollinger Bands consist of a moving average (middle band) plus an upper and lower band set a number of standard deviations away
- The bands widen during periods of higher volatility and narrow during periods of lower volatility
- Price touching or exceeding a band doesn't automatically mean 'overbought' or 'oversold' — bands adjust to volatility
- A sustained period of narrow bands ('the squeeze') is sometimes watched as a precursor to a potential volatility expansion
How Bollinger Bands are constructed
Bollinger Bands consist of three lines plotted on a price chart: a middle band, which is typically a simple moving average (commonly 20-period); an upper band, calculated as the middle band plus a multiple of the standard deviation of price over the same period (commonly 2 standard deviations); and a lower band, calculated as the middle band minus the same multiple of the standard deviation.
Standard deviation is a statistical measure of how spread out a set of values is from their average — in this context, it reflects how much price has been fluctuating around the moving average recently. This means the bands aren't fixed distances from the middle line; they expand and contract based on recent volatility.
Bands widen and narrow with volatility
During periods of high price volatility — large price swings from period to period — the standard deviation increases, causing the upper and lower bands to widen apart from the middle band. During periods of low volatility — smaller, calmer price movements — the standard deviation decreases, causing the bands to narrow.
This adaptive quality is a key feature: the bands aren't a fixed percentage above and below a moving average (as some simpler 'envelope' indicators are) — they respond to the actual recent behavior of the price.
Example: Bands widening after a quiet period
A stock trades in a tight range for several weeks, causing the Bollinger Bands to narrow significantly — sometimes referred to as 'the squeeze.'
The stock then has a large move (in either direction) on significant news.
The bands widen considerably to reflect this newly increased volatility, with the middle band (moving average) also beginning to shift in the direction of the move.
Price relative to the bands
Some traders watch for price touching or moving outside the upper or lower band as a potential signal — for example, price reaching the upper band might be watched for signs of being 'stretched' relative to its recent average, while price reaching the lower band might be watched similarly in the other direction.
However, because the bands are based on standard deviation, price touching or briefly exceeding a band doesn't necessarily mean a reversal is imminent — during a strong trend, price can 'walk along' a band (repeatedly touching or exceeding it) for an extended period while the trend continues, similar to how RSI can remain overbought/oversold during strong trends.
The 'squeeze' concept
A prolonged period of narrow bands (low volatility) is sometimes referred to as 'the squeeze' and watched by some traders as a potential signal that a period of higher volatility could follow — the logic being that markets tend to alternate between periods of low and high volatility over time. However, a squeeze doesn't indicate which direction a subsequent move might go, only that volatility could increase.
Using Bollinger Bands alongside other tools
Because Bollinger Bands are derived from a moving average and recent volatility, they're often used alongside trend-following tools (to understand the broader context of where price is relative to its trend) and momentum indicators (like RSI), rather than as a standalone signal.
Frequently Asked Questions
What do the default settings (20, 2) mean?+
20 refers to the number of periods used for the middle moving average, and 2 refers to the number of standard deviations used to calculate the upper and lower bands — these are the most commonly referenced defaults, though some traders adjust them for different assets or time frames.
Does price touching the upper band mean 'sell'?+
Not by itself — during strong uptrends, price can repeatedly touch or exceed the upper band while continuing to rise. The bands reflect statistical distance from a moving average given recent volatility, not a fixed overbought/oversold threshold.
Are Bollinger Bands a trend or volatility indicator?+
Primarily a volatility indicator (since the band width is driven by standard deviation), though the middle band (a moving average) also provides some trend context, and the overall shape of the bands can reflect both volatility and trend conditions together.