Description
Bollinger Bands®, developed by technical trader John Bollinger, are a volatility-based technical analysis tool that forms a dynamic price envelope around a security's moving average. These bands consist of three lines:
- Middle Band: A simple moving average (SMA) typically set to a 20-period default.
- Upper Band: SMA + (2 × standard deviation).
- Lower Band: SMA − (2 × standard deviation).
Because the bands expand and contract based on standard deviation, they automatically adjust to market volatility. Tightening bands often signal low volatility (potential breakout), while widening bands suggest high volatility (possible trend reversal).
👉 Discover how Bollinger Bands integrate with advanced trading strategies
How Bollinger Bands Work
Key Signals and Interpretations
Squeeze and Breakout:
- A "squeeze" occurs when bands tighten due to low volatility. This often precedes sharp price movements.
- Traders watch for a breakout above/below the bands to confirm a new trend.
Band Width and Volatility:
- Unusually wide bands indicate heightened volatility, potentially signaling the end of a trend.
Price Reversion:
- Prices often oscillate between bands in ranging markets. A bounce off the lower band toward the SMA may target the upper band as a profit-taking zone.
Trend Continuation:
- Prices hugging the upper/lower band for extended periods suggest a strong trend. Divergence with momentum oscillators (e.g., RSI) could hint at exhaustion.
False Breakouts:
- If prices exit the bands but quickly re-enter, the signal is invalidated.
Bollinger Bands Calculation
Simple Moving Average (SMA):
- Calculate the SMA over the chosen period (default: 20 days).
Standard Deviation (StdDev):
- Compute StdDev for the same period.
Bands Formula:
- Upper Band = SMA + (StdDev × Multiplier)
- Lower Band = SMA − (StdDev × Multiplier)
Common Configurations:
| Timeframe | SMA Period | StdDev Multiplier |
|------------|------------|-------------------|
| Short-term | 10 days | 1.5 |
| Medium-term| 20 days | 2.0 |
| Long-term | 50 days | 2.5 |
FAQs
Q: Can Bollinger Bands predict price reversals?
A: They don’t predict reversals but highlight overbought/oversold conditions when combined with other indicators (e.g., RSI).
Q: Why use 20 periods and 2 StdDev by default?
A: This setting balances responsiveness and reliability, capturing ~95% of price action under normal distribution.
Q: How do I avoid false signals?
A: Confirm band breakouts with volume analysis or trend-following indicators like MACD.
Q: Are Bollinger Bands effective for crypto trading?
A: Yes! Their adaptability to volatility makes them popular for cryptocurrencies.
👉 Learn crypto-specific Bollinger Band strategies here
Pro Tips
- Combine with %B Indicator: Measures price relative to band width (0 = lower band, 1 = upper band).
- Avoid Overuse: Bands work best in trending markets; avoid relying solely on them in choppy conditions.
- Adjust Parameters: Test different periods/multipliers to match your trading style (e.g., scalping vs. swing trading).
Bollinger Bands remain a cornerstone of technical analysis, offering insights into volatility, trends, and potential reversals—when used wisely.