Bollinger Bands: Volatility Indicator Explained

What are Bollinger Bands?

Developed by John Bollinger in the 1980s, Bollinger Bands are a volatility indicator plotted on a price chart. They consist of three lines:

1. Middle Band: A 20-period Simple Moving Average (SMA)
2. Upper Band: SMA + (2 × standard deviation)
3. Lower Band: SMA − (2 × standard deviation)

How to Read Them

The Squeeze

When bands contract tightly, it signals low volatility — often preceding a large price move. Traders watch for a breakout above or below the bands.

The Bounce

Prices tend to gravitate back toward the middle band. Touches of the upper or lower band can indicate short-term overbought or oversold conditions.

Breakouts

A close outside the bands is not a signal on its own — it merely indicates the move is statistically extreme (roughly 5% of price action falls outside ±2σ in a normal distribution).

Common Strategies

• Mean Reversion: Buy near the lower band, sell near the upper band in range-bound markets.
• Trend Following: In strong trends, price can "walk the band" — repeatedly touching the upper band in uptrends.
• Confirmation: Combine Bollinger Bands with RSI or MACD to reduce false signals.

Limitations

• Lagging indicator (based on past prices)
• Less effective in strong trends
• Standard settings (20, 2σ) may need adjustment for different assets and timeframes