Indicators5 min read
What Are Bollinger Bands? Volatility Bands Explained
Bollinger Bands, developed by John Bollinger, consist of a middle line — usually a 20-period simple moving average — with an upper and lower band placed two standard deviations away from it.
Because standard deviation is a volatility measure, the bands widen when the market becomes active and contract when it goes quiet. The distance between them is therefore a live readout of how volatile the market currently is relative to its own recent behaviour.
How the bands are built
The middle band is a 20-period SMA. The outer bands sit two standard deviations of price above and below it, recalculated on every candle.
Statistically, roughly 95% of price action falls within two standard deviations of the mean when the data is normally distributed. Market returns are not normally distributed — extreme moves happen far more often than the model implies — which is precisely why band touches are common rather than exceptional.
The squeeze
The squeeze is the most reliable pattern the indicator produces. When the bands contract to an unusually narrow width, volatility has collapsed and the market is coiling.
Low volatility is followed by high volatility — this is one of the few genuinely persistent statistical properties of markets. A squeeze does not predict direction, only that a larger move is likely. Traders typically set orders on both sides of the range and let the expansion pick the side.
Walking the bands
The most expensive mistake with Bollinger Bands is shorting every tag of the upper band. In a strong trend price will "walk the band", riding along the outer edge for an extended run while each counter-trend entry is stopped out.
A band tag means price is statistically stretched, nothing more. In a range that stretch tends to revert; in a trend it tends to continue. Determine which regime you are in before deciding what a touch means.
Combining bands with the middle line
The 20 SMA in the middle is often the most tradeable part of the indicator. In a healthy trend, pullbacks stall around it and continue, giving a defined entry with the outer band as a target.
A clean structure for a funded account: use the middle band for direction, enter on a pullback into it, place the stop beyond the opposite side of the recent swing, and target the outer band. Defined entry, defined invalidation, defined target.
Frequently asked questions
What does it mean when Bollinger Bands squeeze?
It means volatility has fallen to an unusually low level and price is compressing into a narrow range. Historically, low-volatility periods are followed by high-volatility expansion, so a squeeze warns that a large move is likely — but it gives no indication of direction.
Should I sell when price touches the upper Bollinger Band?
Not automatically. In a range, band touches often revert. In a trend, price can walk the upper band for a long stretch while every short is stopped out. Identify the regime first; the touch alone is not a signal.
What settings should I use for Bollinger Bands?
20 periods with 2 standard deviations is the standard and what most other traders are looking at, which matters. Shorter periods react faster and produce more band touches; wider deviations produce fewer, more extreme signals.
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