CYCLEPEDIAThe trading encyclopedia
IT

Bollinger Bands

An SMA 20 plus two bands at ±2 standard deviations: a channel that widens and tightens with volatility. Squeeze = compression that often precedes expansion; walk the band = a healthy trend.

On this page

Bollinger Bands, developed by John Bollinger in the early 1980s, wrap price in a channel that breathes with the market: a central moving average (SMA 20) and two bands set at ±2 standard deviations. When volatility rises the bands widen; when the market calms down, they tighten. The channel does not mark the impossible — it marks the normal of the last 20 periods.

In plain terms — An elastic band around price: when the market gets agitated, the elastic stretches to make room; when it calms, it shrinks back. Touching the elastic does not mean price will turn — it means it is doing something unusual by the standards of recent weeks.

How they are built

Line Formula Role
Middle band SMA 20 The reference: the period's average
Upper band SMA 20 + 2σ The upper edge of "normal"
Lower band SMA 20 − 2σ The lower edge of "normal"

The choice of 2 standard deviations means that, in ordinary conditions, the vast majority of closes fall inside the channel. Band width is itself an indicator (Bandwidth): its recent historical low is the squeeze.

How to read the chart — Price line with dashed gold bands (±2σ) and the central SMA 20 (teal). The sequence shown is the full life cycle: normal volatility → squeeze → expansion with walk the band. Interactive — the highlighted points explain the squeeze, the band walk and mean reversion.

INDICATOR · VOLATILITY Bollinger Bands — volatility that breathes SMA 20 ± 2 standard deviations: the channel adapts to the market CYCLEPEDIA DIAGRAM — EMICICLO BOLLINGER BANDS (20, 2Σ) bands ±2σ SMA 20 squeeze walk the band BAND WIDTH LOW → HIGH 0.7 → 21.1 EXPANSION AFTER THE SQUEEZE × 29.8 Bands describe what is normal: squeeze = waiting, walk = healthy trend
The squeeze (bands at their tightest) precedes the expansion; in the trend that follows, price walks along the upper band.
Hover or tap the highlighted points

Reading it in practice

The bands support two opposite readings, and the regime decides which one applies:

  1. In a range: reversion to the mean — without an underlying direction, price touching a band tends to drift back toward the SMA 20. The classic sideways-market use, to be confirmed by the price reaction at the edge.
  2. In a trend: walk the band — a healthy trend can hug the outer band for dozens of bars. Touching the band here is strength, not excess: selling "because it touched the upper band" in a strong trend is the mirror image of the RSI overbought myth.
  3. Squeeze — bands at minimum width: the market has stopped moving, energy is building. Compression often precedes expansion, without indicating its direction: the squeeze loads the spring, the breakout decides.

Limits and traps

Warning — "It touched the band, so it will revert" is only true in ranges. The first touch after a squeeze is often the beginning of the move, not its end: mistaking the start of a trend for an excess to fade is the fastest way to end up against it.

  • Standard deviation assumes well-behaved dispersion: in crashes price can close outside the bands for days.
  • The parameters (20, 2σ) are the starting convention; shortening or tightening them multiplies false signals.
Suggest an edit My proposals