Bollinger Bands

Bollinger Bands, developed by John Bollinger in the 1980s, have three lines:

• Middle band: a simple moving average, usually 20 periods.
• Upper band: the middle band plus two standard deviations of price over the same 20 periods.
• Lower band: the middle band minus two standard deviations.

Because standard deviation measures how spread out recent prices are, the bands widen when the market is volatile and narrow when it is quiet. A narrow stretch, often called a squeeze, shows a period of low volatility; such periods are often followed by larger moves, though the bands do not say in which direction.

Example

Illustrative figures on an EUR/USD hourly chart: the 20-period average is 1.0850 and the standard deviation of the last 20 closes is 0.0025 (25 pips).

• Upper band: 1.0850 + 2 × 0.0025 = 1.0900
• Lower band: 1.0850 − 2 × 0.0025 = 1.0800
• Width: 100 pips

A week later, after a quiet spell, the standard deviation is 0.0010. The bands are now only 40 pips apart: a squeeze.

Common misconception

Touching the upper band is often described as "overbought" and a reason to sell. In a strong trend, price can ride along the upper band for a long time, and selling every touch means trading against the trend. Bollinger himself described the bands as a way of defining relatively high and low prices, to be used with other information, not as standalone signals.

The bands are related to ATR, another volatility measure, and to overbought and oversold readings from oscillators. Our guide to trend following and moving averages covers the moving average underneath them.