Bollinger Bands

Volatility envelope, squeezes, and band rides.

TL;DR

Bollinger Bands wrap price in two lines representing standard deviations above and below a moving average. They visualise volatility, identify extremes, and signal squeeze breakouts.

Construction

Classic settings: 20-period SMA ± 2 standard deviations. The 20-SMA is the middle band. Upper/lower expand and contract with volatility.

How traders use them

Three signals.

→Mean reversion — tagging the outer band often reverts to middle (works in ranges)
→Squeeze — tight bands = compressed volatility, breakout follows
→Trend rides — in strong trends, price rides the outer band without reverting
→Width as volatility gauge

When they fail

Bollinger Bands fail in trending markets as a reversal tool — price can ride the upper band for weeks. Combine with momentum (RSI, MACD) for confirmation.

Worked example

Bollinger squeeze breakout

SPY ranges $440–$445 for a month. Bands narrow to a 6-month low.

1SetupBands narrow, price ranges
2BreakoutClose above upper band on rising volume
3TargetRange width projected up — $450
4StopBelow squeeze low — $440
5ConfirmationBands expand rapidly

Takeaway

Squeezes forecast directional moves without telling you which way. Wait for close beyond the band for direction.

Common mistakes

What to avoid

!Shorting every upper-band touch in a strong uptrend
!Trading every squeeze — many resolve in chop
!Ignoring the middle band — often supports pullbacks in trends
!Using 20/2 defaults blindly across time frames

Self-check

Test yourself

Q1What are the three Bollinger lines?+

Upper band, middle band (20-period SMA), lower band — outer bands are ±2 standard deviations.

Q2What does a Bollinger squeeze indicate?+

Compressed volatility — bands narrow, often preceding a directional breakout.

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