Bollinger Bands are a volatility indicator created by John Bollinger. They draw a moving average through the price, with an upper and lower band placed a set number of standard deviations away. The bands widen when prices become more volatile and narrow when they calm down.
This article explains how the bands are calculated, works through an example, explains the two most discussed patterns, the squeeze and the band walk, and shows why the same touch of a band can mean opposite things in different markets.
How the bands are calculated
The standard settings are a 20-period simple moving average with bands two standard deviations above and below it.
Middle band: the 20-period simple moving average of closing prices.
Upper band: middle band + 2 × the standard deviation of those 20 closes.
Lower band: middle band − 2 × the standard deviation.
Worked example. Suppose the last 20 closes average 100, with a standard deviation of 2. The middle band is 100, the upper band 100 + 4 = 104, and the lower band 100 − 4 = 96.
If the next weeks become more volatile and the standard deviation rises to 5, the bands move to 110 and 90, even if the average stays at 100. The width of the bands is a direct, visual measure of recent volatility.
Standard deviation measures how spread out the closes are around their average. Under a normal distribution, about 95 percent of observations fall within two standard deviations, but market prices are not normally distributed, and closes outside the bands occur more often than that figure suggests.
Two useful derived measures
%B shows where the price sits relative to the bands: 1 means at the upper band, 0 at the lower band, 0.5 at the middle. Values above 1 or below 0 mean price is outside the bands.
Bandwidth is the distance between the bands divided by the middle band. In the first example, (104 − 96) ÷ 100 = 8 percent. In the more volatile case, (110 − 90) ÷ 100 = 20 percent. Tracking bandwidth over time shows whether volatility is unusually low or high for that instrument. Comparing today's bandwidth with its own range over the past six months or a year is more meaningful than any fixed threshold.
The squeeze
When bandwidth falls to unusually low levels, the bands pinch together around the price. This is called a squeeze.
Volatility tends to alternate between quiet and active phases. A squeeze shows that a quiet phase has lasted a while, and many traders treat it as a warning that a larger move may follow.
The squeeze says nothing about direction. Price may break out upward or downward, and the first move out of a squeeze is sometimes a false start that reverses. Traders who use squeezes typically wait for price to close outside a band with strong volume, and place a stop on the other side of the squeeze range.
For options traders, a squeeze on the underlying is a reminder that quiet periods often end. Implied volatility may be low during a squeeze, which makes buying options cheaper, but only useful if the move arrives before time decay erodes the premium.
Mean reversion versus the band walk
A common belief is that touching the upper band means price is too high and will fall, and touching the lower band means it is too low and will rise. That works in range-bound markets, where price oscillates between the bands and the middle band acts as a magnet.
In strong trends, it fails badly. Price can walk the band, repeatedly closing near or above the upper band in an uptrend, or near or below the lower band in a downtrend, for many sessions. Selling every upper-band touch in such a trend means fighting it.
The practical skill is recognising which market you are in. Clues for a trend include the middle band sloping steeply, bandwidth expanding, and pullbacks holding at the middle band rather than reaching the opposite band. Clues for a range include a flat middle band and price reversing well before the opposite band.
John Bollinger himself recommended combining the bands with other indicators, such as momentum or volume measures, rather than using band touches alone.
Bands and options
Historical, not implied, volatility. The bands are built from past closes, so they reflect realised volatility. Option prices reflect implied volatility, the market's expectation of future moves. Comparing the two can show whether options look expensive or cheap relative to recent price behaviour.
Strike context. Some option sellers look at where the bands sit when choosing strikes, preferring short strikes beyond the outer band. That is context, not protection: price can move through a band in a single session.
Range strategies in ranges only. Structures that profit from price staying in a range, such as iron condors, fit band-bound markets. Using them during a band walk is selling into a trend.
Expanding bands after a squeeze often coincide with rising implied volatility, which hurts short option positions twice: through the move and through higher premiums.
Settings and good habits
Standard settings are a starting point. 20 periods and 2 standard deviations are the defaults. Shorter periods react faster; wider bands are touched less often.
Match the timeframe to your holding period. Bands on a five-minute chart and on a weekly chart describe very different things.
Avoid over-tuning. Settings chosen because they fitted past data perfectly rarely work as well going forward.
Record and review. Keep notes of how price behaved after squeezes and band touches in the instruments you follow, including the failures.
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Frequently Asked Questions
What are Bollinger Bands?
A volatility indicator with a 20-period moving average in the middle and bands, usually two standard deviations, above and below it. The bands widen with volatility and narrow when it falls.
How are Bollinger Bands calculated?
Middle band = 20-period simple moving average; upper and lower bands = middle band plus or minus two times the standard deviation of the same 20 closes.
What is a Bollinger Band squeeze?
A period when the bands narrow unusually, showing low volatility. It often precedes a larger move, but does not indicate the direction.
Does touching the upper band mean sell?
Not necessarily. In ranges, touches often reverse; in strong trends, price can walk along the upper band for many sessions.
Do Bollinger Bands show implied volatility?
No. They are built from past prices, so they reflect historical volatility. Option implied volatility is a separate, forward-looking measure.
Related Reading
- Pairing bands with a momentum reading
- An intraday average weighted by volume
- Realised versus implied volatility
- The move option prices imply
- A range structure for quiet markets
- India VIX and market volatility
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