Indicators
Bollinger Bands
4 min
Bollinger Bands wrap price in a channel that expands and contracts with volatility. They are the classic way to see whether a market is calm or wild.
How they are built
- A middle band — usually a 20-period SMA.
- An upper and lower band set a number of standard deviations (typically two) above and below the middle.
Because standard deviation rises with volatility, the bands widen when price gets volatile and narrow when it goes quiet.
How to read them
- The squeeze — when the bands pinch tightly together, volatility is low and a strong move often follows. The squeeze signals that a move is coming, not its direction.
- Riding the band — in a strong trend, price can hug the upper (or lower) band for a long stretch.
- Mean reversion — in a range, touches of the outer band often snap back toward the middle.
The classic misread
A touch of the upper band is not an automatic sell signal, and a touch of the lower band is not an automatic buy. In a trend, "tagging the band" is normal and persistent. The bands describe where price is relative to recent volatility — they do not call tops or bottoms by themselves. Combine them with trend and momentum.
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