Bollinger Bands place a moving average between two bands based on recent price volatility. They can help traders describe changing volatility and compare price with its recent range. They do not predict where a market must move, and touching an outer band is not a buy or sell signal by itself.
How Bollinger Bands are calculated
A common setup uses a 20-period simple moving average (SMA) for the middle band. The upper and lower bands are calculated by adding or subtracting a chosen multiple of the price standard deviation over the same period.
- Middle band: a moving average of the selected price series.
- Upper band: middle band plus a volatility allowance.
- Lower band: middle band minus the same allowance.
John Bollinger describes 20 periods and two standard deviations as default settings, not universal rules. Different markets and time frames may call for different settings. Two standard deviations also should not be read as a guarantee that a fixed percentage of future prices will stay inside the bands.
What the bands can tell you
Band width and volatility
Wider bands show that price variability has increased over the selected period. Narrower bands show that variability has contracted. A narrow range can precede a larger move, but the bands alone do not identify its direction.
Price touching an outer band
A price reaching the upper band is not automatically overbought, and a move to the lower band is not automatically oversold. In a strong trend, price may continue to move along one band. Read the bands with the wider price structure and other evidence.
A practical way to use the indicator
- Choose a market, price series, period and settings before reviewing a chart.
- Describe the trend and volatility rather than treating a band touch as a signal.
- Decide what additional evidence would confirm or contradict a trade idea.
- Set position size and a loss limit before entering a trade.
- When testing a strategy, include fees, slippage and periods it was not tuned on.
Technical indicators can fail and historical results do not guarantee future performance. Use Bollinger Bands as one description of price behavior, not as a complete investment plan.