What are Bollinger Bands?

What Bollinger Bands are

Bollinger Bands are a volatility indicator developed by John Bollinger in the 1980s. They wrap three lines around price: a middle moving average, usually 20 periods, and an upper and lower band set two standard deviations above and below it. Because standard deviation measures how much price is moving, the bands automatically widen when volatility rises and narrow when it falls.

That gives two readings at once: how volatile the market is (band width) and where price sits relative to its recent range (its position between the bands). It is one of the most popular indicators precisely because it shows both in a single, intuitive picture.

Here is how the three lines are built. The middle band is a plain 20-period simple moving average of the closing price. Take the standard deviation of those same 20 closes, double it, and add it to the middle band for the upper band and subtract it for the lower band. That is the whole calculation.

Because the distance between the bands comes from standard deviation, you never have to adjust them for the pair or the timeframe. On a sleepy AUD/NZD daily chart or a fast gold 5-minute chart, the bands scale themselves to whatever the market is doing.

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The three bands

The diagram below shows the structure: a middle moving average with an upper and lower band that breathe in and out with volatility. Notice how the bands narrow during the quiet stretch (the squeeze) and widen as the move expands, with price spending most of its time inside them.

Roughly 90 percent of price action stays within the bands, which is why a move that pushes hard against or outside a band stands out: it signals an unusually strong push, which may either mark an extreme or, in a trend, confirm strength.

The squeeze

The squeeze is the signal Bollinger Bands are best known for. When the bands narrow sharply, volatility has dropped and the market has gone quiet, often coiling before a larger move. The logic is that markets cycle between low and high volatility, so an unusually tight squeeze tends to be followed by expansion.

1. The squeeze forms. Band width falls to its lowest reading in months and the candles shrink. Nothing to trade yet, just a range to mark.
2. Price closes outside a band. That close is the first real information about direction. Here it is a close above the upper band.
3. The bands expand. Volatility returns, the bands flare apart and price keeps pressing the outer band in the direction of the break.

I measure the squeeze with band width rather than by eye, because a chart that has been quiet for weeks always looks tight. What matters is that it is tight relative to its own recent history.

The catch is that the squeeze does not tell you direction. It flags that a big move may be coming, not which way. Traders use it as a heads-up to prepare, then take the directional cue from the breakout itself and from other signals like the trend and momentum. Squeezes are especially useful in the quiet before a major economic release.

How to use them

A few sound ways to read the bands:

• Volatility context. Wide bands mean an active, possibly trending market; narrow bands mean a quiet one. This alone helps you pick the right strategy for conditions.
• Riding the band in a trend. In a strong uptrend, price walking up the upper band confirms strength rather than signalling a sell. The same applies in reverse for downtrends.
• Mean reversion in a range. In a sideways market with flat bands, touches of the upper and lower bands can mark the edges of the range, used the same way as support and resistance.

The right use depends entirely on whether the market is trending or ranging, which the band width itself helps you judge. The next two diagrams show both cases.

Walking the band in a trend

1. Closes ride the upper band. This is strength. Selling here because price "touched the top" is how beginners end up short a trend.
2. Pullbacks hold above the middle band. While that keeps happening the trend is intact, and those dips are where trend traders add.
3. A close below the middle band. Momentum has faded. Not an automatic short, but it is time to tighten stops or take some profit.

Fading the edges of a range

1. Price closes outside the lower band. On its own, that is just an extended move.
2. The next candle closes back inside. That failed push is the signal. Enter on the close, with the stop a few pips beyond the extreme low.
3. Target the middle band. In a range the 20 SMA is the natural first objective. Some traders hold part of the position for the opposite band.

The whole setup depends on the bands being flat. Run the same trade when the bands are wide and sloping and you are fading a trend, which is the quickest way to lose money with this indicator.

Free Bollinger Bands cheat sheet

Everything above on one printable A4 page: the band, band width and %B formulas, labelled diagrams of the squeeze, walking the band and the range fade, a signals table that says what each reading means and how to act on it, five rules of thumb and the three mistakes I see most often.

Common mistakes

The classic Bollinger Band errors:

• Selling every upper-band touch. In a trend, price rides the band. This is the single most common mistake and a direct way to fight a strong move.
• Trading the squeeze blind. A squeeze signals a move is likely, not its direction. Wait for the breakout.
• Ignoring the trend. Mean-reversion tactics work in ranges, not trends. Read band width to tell which you are in.
• Skipping risk management. As always, the position size and stop protect the account, not the indicator.

Read with the trend and confirmed by price, Bollinger Bands give a strong volatility read. Build the rest of the foundation with RSI, moving averages and support and resistance, and choose a broker with full charting from the best forex brokers in Australia ranking.

Frequently asked questions