Stock Market · Technical Analysis

Bollinger Bands

What are Bollinger Bands?

Bollinger Bands consist of three lines plotted around price: a middle band (20-day SMA) and an upper and lower band placed 2 standard deviations above and below the SMA.

Developed by John Bollinger in the 1980s, they measure VOLATILITY, how much price is moving relative to its recent average.

The standard deviation concept

When price is volatile, the bands widen. When price is calm and ranges tightly, the bands narrow. This makes Bollinger Bands self-adjusting to market conditions, unlike fixed levels.

> ~95% of price action occurs within the bands. A touch of the outer band is statistically unusual.

The Squeeze. The most powerful Bollinger signal

When the bands narrow significantly (low volatility), it means the market is coiling. This is called a squeeze. It often precedes a major breakout, though the direction isn't given by the squeeze itself.

Low volatilityalways precedes high volatility. The squeeze is the setup; the breakout is the trade.

Overbought / Oversold

• Price touching/exceeding the upper band: potentially overbought (but in strong trends, price can 'walk the band' upward for extended periods)
• Price touching/exceeding the lower band: potentially oversold

Important: touching the band is not automatically a sell or buy signal. In trending markets, price hugs the band. Use it with other indicators.

The %B indicator

A derived indicator showing where price is within the bands: 1.0 = upper band, 0.5 = middle, 0 = lower band. Values above 1 or below 0 mean price has broken outside the bands.

Best use case

Bollinger Bands are excellent for identifying consolidation periods (squeeze) before breakouts, and for contextualising whether a price move is extreme relative to recent history.

Takeaway. Bollinger Bands widen in high volatility, narrow in low. A squeeze (narrow bands) often precedes a major breakout.