Bollinger Bands
Bollinger Bands are two bands drawn two standard deviations either side of a 20-period simple moving average. The bands narrow when price calms down and widen when it becomes active, so they show volatility on the price chart. Price touching a band is not a signal on its own.
Which question do Bollinger Bands answer?
Bollinger Bands answer this question: how far is price from the average of the last 20 candles, and is that distance large compared with the usual variability of the period? The middle band shows the average; the outer bands show how widely the closes are spread around it.
The width of the bands is not fixed. When closes stay close together the standard deviation shrinks and the bands narrow; when closes spread out the bands widen. So Bollinger Bands say more about changes in volatility than about direction.
How it is calculated
- Calculate the middle band. Middle band = simple moving average of the last 20 closes (20 SMA). Every close carries equal weight.
- Find the standard deviation. How far the same 20 closes stray from the middle band is measured by the standard deviation. If the closes sit near the average it is small; if they are scattered it is large.
- Draw the outer bands. Upper band = middle band + 2 × standard deviation. Lower band = middle band − 2 × standard deviation. The default setting is 20 periods and 2 standard deviations.
- Measure the bandwidth. Bandwidth = (upper band − lower band) ÷ middle band. Because it is a ratio, it can be compared across price levels and assets.
How it is commonly read
- Squeeze: bandwidth drops to its lowest level in a while. It describes a quiet period; an expansion may follow, but the squeeze says nothing about its direction or timing.
- Expansion: the bands open quickly. Price has left the quiet range with a breakout or a sharp move.
- Walking the band: in a strong trend, closes come one after another near or above the upper band (or the lower band in a decline). This shows the move is strong, not that it is overstretched and ending.
- Middle band: the average that pullbacks in a trend often visit. Which side of it price stays on gives a rough idea of short-term direction.
Squeezes and expansions are covered in more detail on the volatility page. The middle band is a simple moving average; the moving averages page explains the difference between SMA and EMA.
What does a band touch tell you?
Price touching the upper or lower band does not on its own mean "too high" or "too low". The context changes the reading.
Strong uptrend
Closes move along the upper band. Each touch can come with a new high; here the band is not a limit but a measure of the move's strength.
Strong downtrend
Price falls along the lower band. Touching it does not show the decline has ended; the bands open downwards with price.
Sideways market
Price moves back and forth between the bands. Approaches to the bands can line up with the range's edges, but when the range breaks the same touch can be a start.
What it shows, what it does not prove
What it shows
- How far price is from the 20-candle average, relative to the variability of the period
- That volatility is contracting or expanding
- How one-sided the closes are in a strong trend (walking the band)
What it does not prove
- That price touching a band will turn back
- Which way, or when, a squeeze will resolve
- That the bands are support or resistance levels; they are recalculated every candle and move with price
The MarketLevelMap view
How it relates to zones
Bollinger Bands are moving limits, recalculated every candle; they do not mark a fixed area where price has reacted before. Support and resistance zones rest on places where price turned or paused in the past. The two measure different things.
That is why reading them together is informative. Approaching a resistance zone with narrow bands describes a quiet period continuing just below the zone. A close beyond the zone with the bands opening can show that the breakout came with an expansion in volatility too. The zone's thickness as a band, however, is independent of the width of the Bollinger Bands.
Often confused with
For general information only. Not investment advice.Last updated: