Bollinger Bands

Introduction

Moving averages tell you the trend; RSI and MACD tell you momentum; VWAP brings in volume. None of them directly answer another vital question: how much is price moving? That is volatility, and Bollinger Bands — devised by John Bollinger — are the most popular way to put volatility on a chart. They take a moving average and wrap it in an envelope that breathes: widening when the market gets jumpy, tightening when it goes quiet.

That single behaviour — bands that expand and contract with volatility — is what makes them useful, and also what makes them so easy to misread. The temptation to treat a band touch as "overbought" is strong and, in trends, wrong.

How The Bands Are Built

Bollinger Bands have three lines:

• A middle band — a moving average, conventionally the 20-period simple moving average.
• An upper band — the middle band plus a number of standard deviations of price (conventionally 2).
• A lower band — the middle band minus the same number of standard deviations.

The key ingredient is standard deviation, a statistical measure of how spread out recent prices have been. When price swings are large, standard deviation is high and the bands sit far apart; when price is calm, standard deviation is low and the bands close in. The bands are, quite literally, a picture of volatility wrapped around the average.

Reading The Width: The Squeeze

The distance between the bands is itself the most valuable read. When the bands contract into a tight pinch — a squeeze — volatility has fallen to an unusually low level. Markets do not stay quiet forever, so a squeeze is often a heads-up that a volatility expansion (a bigger move) may follow.

But here is the discipline: a squeeze says nothing about direction. It suggests a larger move may be coming; it does not tell you up or down. Pairing a squeeze with a directional guess is reading something into the bands that is not there. The squeeze is a statement about energy, not destination.

Conversely, very wide bands signal that volatility is already high — often after a big move. Periods of extreme width tend, eventually, to contract back toward calm, just as squeezes tend to expand. Volatility is famously mean-reverting in this loose sense: quiet follows loud and loud follows quiet, even though the price direction in between is not implied.

The Band-Touch Trap

The most common Bollinger mistake mirrors the RSI one. Because roughly 95% of recent price action sits within 2-standard-deviation bands, a touch of the upper band looks like price has gone "too far" — tempting a reading of "overbought, sell." In a range, price does often oscillate from band to band. But in a strong trend, price can "walk the band" — riding along the upper band for an extended advance (or the lower band for an extended decline).

A band touch describes that price is statistically stretched from its recent average. That is genuine information — but "stretched" is not "about to reverse," and treating every upper-band tag as a sell repeatedly fails in exactly the trends where the biggest moves happen.

A Worked Example

A share goes quiet: its Bollinger Bands contract to their tightest in months — a clear squeeze. An analyst notes "volatility is unusually compressed; a larger move may be brewing, direction unknown." Days later price breaks out of the pinch and the bands flare wide as it climbs, with price now walking the upper band for two weeks.

A reader who saw the first upper-band touch as "overbought, sell" would have fought a strong trend. The accurate description throughout: "a low-volatility squeeze resolved into a volatility expansion; price is now trending strongly and riding the upper band." Every part of that is about volatility and position, not a prediction — and the direction of the breakout was revealed by price itself, never by the squeeze.

The Honest Limits

• The bands describe volatility and relative position — not direction. Width tells you how much price is moving; a band tells you how far price is from its average. Neither says which way price goes next.
• A squeeze hints at a bigger move, not its direction. Reading direction into a squeeze is the classic error.
• A band touch is not overbought/oversold. In trends, price walks the band. "Stretched" is strength as often as it is exhaustion.

Bollinger Bands show volatility as an envelope around price. The next indicator, ATR, measures the same underlying thing — how much a market moves — but as a single, plain number, which makes it especially useful for sizing what "a normal move" even is.