Bollinger Bands
The middle band is the 20-day moving average and the outer bands sit two standard deviations away: the bands "breathe" with volatility.
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Text version · Trend Indicators, lesson 5: “Bollinger Bands”
The middle band is the 20-day moving average and the outer bands sit two standard deviations away: the bands "breathe" with volatility.
Bands that breathe
Bollinger Bands: the middle band is a 20-day moving average, and the upper and lower bands = middle ± 2 standard deviations. Big swings open the bands; small swings squeeze them.
Squeezes and riding the bands
When bandwidth shrinks to extremely narrow, that's a squeeze, often a prelude to a big move, but it doesn't tell you the direction. In a strong rally price can "ride the upper band" all the way: that's strength, not a sell signal.
%b: where price sits in the bands
%b turns position into a number: 0 is the lower band, 0.5 the middle band, 1 the upper band; above 1 means a close outside the upper band. Bandwidth is the distance between the bands divided by the middle band, used to spot squeezes.
Key takeaways
- Middle band = SMA20; upper and lower bands = middle band ± 2 × standard deviation.
- Most of the time price stays inside the bands. Touching the upper band doesn't mean you must sell; strong trends ride along the upper band.
- %b shows where price sits within the bands (0 = lower band, 1 = upper band). A narrowing band (a squeeze) is often followed by a big move, but the squeeze doesn't tell you the direction.
Try it yourself
You can do these exercises in this lesson's interactive simulation:
- Choose "Range, then breakout": where is the purple squeeze zone? Which band did price break out of afterwards?
- Switch to "Uptrend" and find the green "Riding the upper band" zone: if you sold every time price touched the upper band, what would you miss?
- Change multiplier k from 2 to 1, then to 3: what is the "Share of closes inside the bands" each time?
- Switch the lower panel to "%b position" and find a candle with %b above 1. Where is it relative to the bands?
Quiz and explanations
- 1. When Bollinger Bands narrow sharply, it usually signals…
- Answer: Very low volatility, possibly building up to a big move.Volatility cycles between low and high.
- 2. In a strong rally, price keeps hugging the upper band. What does that mean?
- Answer: The trend is strong, so it's not simply a sell signal.Riding the upper band is a sign of strength.
- 3. A candle has %b = 1.2. What does that mean?
- Answer: The close is above the upper band.%b above 1 means a close above the upper band; below 0 means a close below the lower band.
Terms in this lesson
- Bollinger Bands: A volatility channel with a 20-day moving average in the middle and bands 2 standard deviations above and below.
- squeeze (Squeeze): When a channel narrows sharply and volatility is low, often just before a big move.
- standard deviation (Standard Deviation): A statistic for how far data spreads from its average; the bigger the swings, the bigger the standard deviation.