Bollinger Bands
Bollinger Bands wrap price in a volatility envelope two standard deviations around a moving average. Learn band squeezes, walking the bands, and mean-reversion setups.
Full name
Bollinger Bands
Default settings
20 periods, 2 standard deviations
Formula
Middle = SMA(20); Upper = SMA + 2 × standard deviation; Lower = SMA − 2 × standard deviation
What Bollinger Bands show
John Bollinger's bands plot a 20-period simple moving average with an upper and lower band two standard deviations away. The bands widen when volatility rises and contract when it falls, so they show you how quiet or wild a market is compared with its recent past.
How to read them
The squeeze
When the bands contract to their narrowest in months, volatility is unusually low. Low volatility tends to be followed by expansion, so a squeeze often comes before a breakout. The squeeze doesn't tell you which direction, so wait for price to close outside the range.
Walking the bands
In a strong trend price can hug the upper (or lower) band for many bars. A touch of the upper band is not automatically a sell signal; in a trend it shows strength.
Mean reversion in ranges
In a sideways market, moves to the outer bands often snap back toward the middle band. This works only while the range holds, so pair it with clear support and resistance and a stop beyond the range.
Common mistakes
- Selling every upper-band touch in a trending market.
- Assuming a squeeze tells you the breakout direction.
- Forgetting that statistical bands don't contain price "95% of the time" in real markets, whose returns aren't normally distributed.
For a strategy built on volatility contraction, see the breakout trading strategy.
Indicators work best inside a plan
See which strategies use this indicator, then size the trade before you enter.