Bollinger Bands

Overview

Created by John Bollinger in the 1980s, Bollinger Bands are a volatility-adaptive envelope around a moving average. The width of the bands expands when volatility increases and contracts when volatility decreases — making them one of the cleanest visualisations of market state.

The indicator has three components:

• Middle band — usually a 20-period Simple Moving Average
• Upper band — middle + 2 standard deviations
• Lower band — middle − 2 standard deviations

Formula

Middle Band = SMA(price, 20)
Upper Band  = Middle Band + (2 × StdDev of price over 20)
Lower Band  = Middle Band - (2 × StdDev of price over 20)

Default Settings

• Period: 20
• Standard deviations: 2

For more sensitive signals: period 10, 1.5 std dev. For smoother / longer-term: period 50, 2.5 std dev.

How to Use It

1. Volatility Squeeze

When bands contract sharply, volatility is low — often a precursor to a strong move. The narrow band is the “squeeze”. A breakout from squeezed bands in either direction is often violent and clean.

2. Mean Reversion at Bands

In ranging markets, price tends to bounce between the bands:

• Touch lower band → bounce up toward middle / upper
• Touch upper band → pull back toward middle / lower

Best paired with an oscillator (RSI, Stochastic) for confirmation.

3. Walking the Band

In a strong trend, price “walks” along the band — closing repeatedly near or beyond the upper band in an uptrend, lower band in a downtrend. This is NOT a reversal signal; it’s a sign of strong trend momentum. Many traders misread it.

4. Bollinger Band Width (BBW)

A standalone histogram showing the distance between bands. Useful for spotting low-volatility regimes before a breakout.

5. %B Indicator

Calculates where price sits within the bands as a percentage. Above 1 = above upper band; below 0 = below lower band. Useful for systematic signals.

Strengths

• Visually clear — instantly shows volatility regime
• Adaptive — bands automatically widen / narrow with market conditions
• Works on every asset class, every timeframe
• Powerful when combined with momentum oscillators or trend filters

Weaknesses & Common Mistakes

• Fading every band touch — in trends, repeated touches are NOT reversal signals; you’ll be caught against strong moves
• Trading squeezes alone — many traders short the squeeze; squeezes resolve in either direction unpredictably without other confirmation
• Static settings — period 20 / 2 std dev doesn’t fit every market; sometimes (50, 2.5) reads cleaner
• Ignoring middle band — the 20-SMA itself is meaningful trend filter; many users focus only on outer bands

Best Combinations

• Bollinger + RSI — price touches lower band AND RSI below 30 = high-probability mean reversion
• Bollinger + 200 EMA — use band touches only in the direction of the higher-timeframe trend
• Bollinger + Volume — breakouts from squeeze with high volume tend to follow through; without volume usually fail
• Bollinger + Keltner — when Bollinger Bands fit inside Keltner Channels, volatility is at extreme lows (“Bollinger Squeeze” pattern)

Practical Example

Bitcoin, 4H chart. After a strong rally, price touches the upper Bollinger Band repeatedly — walking the band. RSI stays in 70–80 range. Don’t short. Wait for a candle close back inside the band combined with RSI bearish divergence; that’s the signal that momentum is fading.

Bottom Line

Bollinger Bands don’t predict direction — they predict volatility regime. Use them as context, not as a trigger.