Bollinger Bands

The idea in plain words

Prices spend most of their time near their average. The bands are drawn a set number of "typical distances" (standard deviations) away from the average, so they show what counts as unusually high or low right now, given how volatile the market currently is.

How it is calculated

The middle line is a 20-candle simple moving average. The bands are placed two standard deviations above and below it. Standard deviation is a measure of how spread out the recent prices are.

Middle = SMA(close, 20)
Upper = Middle + 2 × standard deviation of the last 20 closes
Lower = Middle − 2 × standard deviation of the last 20 closes

How to use it

• The squeeze: very narrow bands mean an unusually quiet market, which is often followed by a big move.
• In ranges, prices touching the lower band and turning up can be buying points; the upper band, selling points.
• In strong trends, prices "walk the band": repeated closes near the upper band are a sign of strength, not a reason to sell.

Drawing conclusions

• A close outside a band is unusual but not automatically a reversal signal.
• The middle band often acts as support in uptrends and resistance in downtrends.

Watch out for

• The squeeze tells you a move is likely, not its direction.
• Selling every touch of the upper band works in ranges but fails in strong trends.

A little history

John Bollinger developed the bands in the early 1980s and later wrote "Bollinger on Bollinger Bands" (2001).