Guide
What are Bollinger Bands?
Bollinger Bands are a volatility indicator: a middle moving average with an upper and lower band placed a set number of standard deviations away from it. The bands widen when price gets volatile and contract when it goes quiet, so they wrap price in an envelope that breathes with the market. They describe how stretched or calm price is — not which way it will go next.
What Bollinger Bands measure
The bands measure volatility around an average. The middle line is a simple moving average — typically over 20 periods — and the outer bands sit a fixed multiple of standard deviation above and below it, usually two. Standard deviation is a statistical measure of how far recent prices have strayed from their average, so the band width is, in effect, a live read of how jumpy the instrument currently is.
How Bollinger Bands are calculated
First you compute the moving average for the middle line. Then you measure the standard deviation of price over the same lookback. The upper band is the average plus a chosen number of standard deviations; the lower band is the average minus the same. When recent prices are scattered, standard deviation is large and the bands flare out. When prices cluster tightly, standard deviation shrinks and the bands pinch in — the well-known squeeze.
How to read Bollinger Bands
A squeeze — bands contracting to a narrow neck — signals that volatility has dried up and often precedes a sharp expansion, though it does not say in which direction. Price riding the upper band in a strong uptrend shows persistent strength, not an automatic sell. Tags of the outer bands mark statistically stretched moves; in a range they can mark turning points, but in a trend they simply confirm momentum. The bands frame price relative to its own recent behaviour.
What Bollinger Bands do not do
The bands do not predict direction. A squeeze tells you a move is brewing, not whether it breaks up or down. Touching a band is not a reversal signal — in trending markets price can walk along the outer band for many bars. The bands also lag, because they are built on a moving average, and on illiquid Indian stocks erratic prints can distort the standard deviation and produce misleading width.
The classic Bollinger Bands misuse
The most common mistake is fading every band touch: sell when price hits the upper band, buy when it hits the lower. In a ranging market that has some logic, but applied blindly during a strong trend it means selling strength again and again as price keeps climbing the upper band. Bollinger Bands work as a volatility context, confirmed by trend and structure — not as a mechanical reversal trigger.
Common Questions
Frequently Asked Questions
What do Bollinger Bands tell you?
+They tell you how volatile price currently is relative to its recent average. Wide bands mean high volatility; narrow bands mean a quiet, compressed market. They describe the state of volatility, not the future direction of price.
What is a Bollinger Band squeeze?
+A squeeze is when the upper and lower bands contract to a narrow neck because volatility has fallen sharply. It often precedes a strong expansion in price, but it does not indicate whether the breakout will be up or down. Traders watch a squeeze as a heads-up, then look to structure for direction.
Do Bollinger Bands predict reversals?
+Not reliably. A band touch can mark a turning point in a sideways market, but in a trending market price often rides the outer band for many bars without reversing. Treating every band tag as a reversal is a frequent error.
What settings are common for Bollinger Bands?
+A 20-period moving average with bands set at two standard deviations is the most widely used default. Shorter lookbacks react faster but give more false flags; longer ones are smoother but slower. The right setting depends on the timeframe and instrument you trade.