Technical Analysis · Intermediate · 4 min
Bollinger Bands
You can explain how Bollinger Bands are calculated, read a squeeze and a band walk, and apply Bollinger's own rule that a touch is not a signal.
A band that breathes
Most indicators give you a line. Bollinger Bands give you a channel around the price that expands and contracts by itself: narrow when the market is calm, wide when it moves wildly.
They are among the most popular tools on any chart, and among the most misused. Their inventor published a list of rules for them, and the most important one is about what they do not mean.
Average plus two deviations
Bollinger Bands, developed by John Bollinger, have three lines:
- Middle band: a simple moving average, by default over 20 periods.
- Upper band: the middle band plus two standard deviations of the closing prices over the same 20 periods.
- Lower band: the middle band minus two standard deviations.
A standard deviation measures how widely prices have varied around their average. So the bands widen when prices become more variable, and narrow when they calm down.
Bollinger's own published rules include several points that are often ignored:
- "Tags of the bands are just that, tags not signals." A touch of the upper band is not in itself a sell signal, and a touch of the lower band not a buy signal.
- In trends, prices walk the bands. The price can move along the upper band for a long time in a strong rise.
- Closes outside the bands are initially continuation signals, not reversal signals.
- The defaults of 20 periods and 2 standard deviations are just defaults.
A period of unusually narrow bands is often called a Bollinger squeeze. It shows that volatility is low, and calm periods often end with a larger move. The squeeze does not say in which direction.
Squeeze, then a walk
In the fictional chart, the price moves sideways between about 80.30 and 81.30 for 33 candles. The bands narrow until, on candle 33, they are only about 0.70 apart: a squeeze.
- On candle 34, the price closes at 82.38, above the upper band near 81.58.
- Over the next seven candles, it keeps closing near or above the upper band, rising to 87 on candle 41.
- The bands widen sharply as volatility rises. The lower band even falls, because the spread of prices has grown.
A trader who sold each touch of the upper band as "overbought" would have sold into the strongest part of the move, exactly what Bollinger's rules warn against. The close outside the band was, as the rules say, initially a sign of continuation.
Common mistakes
- Selling every touch of the upper band. In trends, the price walks the band.
- Assuming the squeeze direction. Narrow bands say a move may come, not which way.
- Reading the bands as price targets. They describe recent variability, not where the price must go.
- Combining related indicators. Bollinger warns that two momentum indicators are not better than one.
The takeaway
Bollinger Bands put a band around a moving average. Narrow bands show calm, wide bands volatility. A touch is not a signal.
Check yourself
Quick quiz
4 questions. Instant feedback, nothing is saved.
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1Tap the candle that closed above the upper band after the squeeze.
Tap the chart.
Candle 34 closed at 82.38, above the upper band near 81.58, right after the bands had been at their narrowest.
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2How are standard Bollinger Bands built?
The bands widen when prices become more variable and narrow when they calm down. 20 and 2 are Bollinger's defaults.
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3What does John Bollinger say about a touch of the upper band?
His rules state that tags of the bands are just tags. In trends, prices can walk up the upper band.
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4What is a Bollinger squeeze?
Narrow bands show calm. Calm periods often end with a move, but the squeeze does not say in which direction.
of 4 correct.