Bollinger Bands

A stretchy band around price

Bollinger Bands were created by a trader named John Bollinger in the 1980s. They are three lines drawn over the candles:

• Middle line: a 20-day simple moving average.
• Upper band: the middle line plus 2 standard deviations.
• Lower band: the middle line minus 2 standard deviations.

So what's a standard deviation? It's a number that measures how spread out prices are from their average. A small number means prices stay close together (calm). A big number means prices are all over the place (wild).

Work one out

Real Bollinger Bands use 20 days. We'll use 4 to keep the math tiny.

The calm lemonade stand. Prices: $9, $11, $9, $11. The average is $10. Every price is exactly $1 away from the average, so the standard deviation is $1.

• Upper band = 10 + 2 × 1 = $12
• Lower band = 10 - 2 × 1 = $8

The wild lemonade stand. Prices: $7, $13, $7, $13. The average is still $10. But every price is $3 away, so the standard deviation is $3.

• Upper band = 10 + 2 × 3 = $16
• Lower band = 10 - 2 × 3 = $4

Same average, very different bands. Calm prices make narrow bands. Wild prices make wide bands. When prices aren't all the same distance from the average, the math takes a few more steps, but your trading app does it for you.

What it looks like

The bands breathe in and out with the market:

• When price goes quiet for a while, the bands pinch together. That's called a squeeze.
• When a big move starts, the bands suddenly spread apart.

How traders read it

1. The squeeze. Quiet times often come before loud times, like the calm before a storm. Traders watch a squeeze for a breakout. The catch: a squeeze doesn't tell you which direction the breakout will go.
2. Stretched or not. Most closes land inside the bands. A close outside a band means price is unusually far from its average, so some traders expect it to drift back toward the middle line. This works better in sideways markets.
3. Walking the band. In a strong trend, price can hug the upper band (or the lower band) for days or weeks. Each touch is a sign of strength, not a reason to bet on a turn.

Where it fails

The biggest beginner mistake is thinking, "Price touched the upper band, so it must fall." In a strong uptrend, that idea loses again and again, because price keeps walking up the band. Also, many squeezes break out one way, trick everyone, and then rush the other way. The bands show calm and wild. They don't show what comes next.

Remember

• Middle line = 20-day average. Bands = 2 standard deviations above and below it.
• Narrow bands mean calm. Wide bands mean wild.
• A squeeze often comes before a big move, but it doesn't tell you the direction.
• Touching a band is not, by itself, a reason to expect a turn.