Bollinger Bands, created by John Bollinger in the 1980s, wrap price in an envelope that widens when volatility rises and narrows when it falls. They help judge whether price is relatively high or low compared with its recent range, and they flag quiet periods that may come before a breakout.
How it’s calculated
- Middle band = 20-period simple moving average
- Upper band = middle band + 2 × standard deviation of the last 20 closes
- Lower band = middle band − 2 × standard deviation of the last 20 closes
Two derived measures:
- %B = (price − lower band) ÷ (upper band − lower band). Above 1 means price is above the upper band; below 0, under the lower band.
- Bandwidth = (upper − lower) ÷ middle. Low values identify a squeeze.
Example
A stock’s 20-period SMA is 50.00 and the standard deviation of its last 20 closes is 1.50.
- Upper band = 50.00 + 2 × 1.50 = 53.00
- Lower band = 50.00 − 2 × 1.50 = 47.00
- Bandwidth = (53.00 − 47.00) ÷ 50.00 = 12%
If price closes at 52.00, %B = (52.00 − 47.00) ÷ 6.00 ≈ 0.83: in the upper part of the band, but inside it. If, weeks later, the standard deviation falls to 0.60, the bands tighten to 48.80–51.20 (bandwidth 4.8%): a squeeze worth watching.
Common mistakes
- Fading every band touch. In a trend, repeated closes near the upper or lower band show strength, not exhaustion.
- Guessing the squeeze direction. A squeeze says a move may come, not which way. Wait for a close outside a range or pattern, and watch for a false breakout.
- Treating the bands as support and resistance. They are statistical envelopes that move every bar, not fixed levels.
- Assuming 95% of prices stay inside. That rule comes from a normal distribution; market returns are not normal, so outside closes happen more often than the textbook suggests.
- Using them alone. Pair with a momentum tool like RSI or a volatility measure like ATR.
For setups and examples, read the Bollinger Bands guide.
Educational content — not financial advice.
Updated