Bollinger Bands

A volatility indicator consisting of a moving average flanked by two bands set two standard deviations above and below it, which expand during high volatility and contract during low volatility.

Bollinger Bands were created by John Bollinger in the 1980s. The middle band is a 20-period simple moving average; the upper and lower bands are set two standard deviations above and below it. Because standard deviation measures volatility, the bands automatically widen when the market is volatile and narrow when it is calm. Approximately 95% of price action falls within the bands under normal conditions.

Key Bollinger Band signals include the "squeeze" — when the bands contract to unusually narrow width, signaling a period of very low volatility that typically precedes a significant move (though the direction is not revealed by the squeeze itself). The squeeze is identified by the Bollinger Band Width indicator falling to multi-year lows. After the bands tighten, traders watch for which direction price breaks to determine the likely move direction.

Price touching or exceeding the upper band is not automatically a sell signal — in a strong uptrend, price can "walk" along the upper band. Similarly, touching the lower band in a downtrend is not automatically bullish. The bands are most useful in conjunction with other indicators: RSI divergence at a band extreme, for example, provides much stronger evidence of a reversal than the band touch alone.

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