What are Bollinger Bands?

How they are built

• Middle band: a 20-period simple moving average.
• Upper band: the average plus 2 standard deviations.
• Lower band: the average minus 2 standard deviations.

Standard deviation measures how far closing prices stray from their average. When price moves a lot, it grows and the bands spread apart; when price calms down, it shrinks and the bands come together.

Example: if the 20-period average is at $80 and the standard deviation is $1.50, the upper band sits at 80 + 3 = $83 and the lower band at 80 − 3 = $77.

Squeeze and expansion

When the bands get very narrow, it’s called a squeeze. Volatility tends to alternate between quiet periods and busy ones, so a squeeze often comes before a bigger move.

What the squeeze doesn’t tell you is the direction. That’s why it is combined with another clue: a break of support or resistance, or a rise in volume.

A squeeze example

Example: a stock trades around $45 and, over two weeks, the distance between the bands shrinks from $6 to $1.80. Price barely moves. One day it breaks resistance at $46 on twice its average volume and closes at $47.20, outside the upper band. The bands start to open up: volatility is back.

That close outside the band doesn’t mean price is “too high.” It’s the expansion the squeeze was signaling. If price had broken support instead, the same squeeze would have come before a drop.

Touching a band is not a signal

A common mistake is treating every touch of the upper band as a sell signal and every touch of the lower band as a buy signal. In a sideways market, price does tend to drift back toward the average after touching a band. But in a strong trend, price can walk the band for many periods, and betting against it there gets expensive.

To tell one case from the other, look at the trend first: if highs and lows are rising and the middle band points up, touches of the upper band are a sign of strength, not exhaustion.

How to use them in practice

The middle band works as a reference for the short-term trend and, in healthy trends, as a zone where pullbacks tend to stall. The width of the bands tells you whether the market is calm or choppy, which helps when deciding how far away to place a stop loss. And a squeeze warns you to watch for a breakout.

You can also measure band width: the distance between the upper and lower bands divided by the middle band. Comparing that width with previous months tells you whether current volatility is low or high for that asset. Some platforms show it as a separate indicator called Bandwidth.