Bollinger Bands
Technical Analysis
Bollinger Bands plot a moving average with two volatility-based bands, helping traders judge whether price is relatively high, low, or expanding in volatility.
What are Bollinger Bands?
Bollinger Bands, developed by John Bollinger, are a technical indicator made up of three lines plotted on top of the price chart:
- A middle band — typically a 20-period simple moving average.
- An upper band — the middle band plus 2 standard deviations of price over the same period.
- A lower band — the middle band minus 2 standard deviations.
Because standard deviation measures how spread out price has been, the bands automatically widen when volatility rises and contract when volatility falls — giving Bollinger Bands their signature “squeeze and expand” look.
Reading Bollinger Bands
- Price near the upper band suggests price is relatively high compared with its recent average and volatility, though this is not automatically a sell signal — in a strong uptrend, price can “walk the band” and stay near the upper line for an extended stretch.
- Price near the lower band suggests the opposite — relatively low compared with recent activity.
- A “squeeze” — when the bands narrow sharply — signals unusually low volatility, which Bollinger Band traders often watch for as a precursor to a bigger, sharper move once volatility expands again.
Example
If EUR/USD has been trading in a tight range for two weeks with the Bollinger Bands squeezed close together, a trader might anticipate an upcoming volatility expansion and watch for a decisive break above the upper band or below the lower band as a signal of which direction that expansion is likely to favor.
Why it matters
Bollinger Bands give traders a dynamic, self-adjusting way to gauge relative price levels and volatility conditions, which static support/resistance lines cannot do on their own. They work well combined with other tools such as the RSI (to confirm overbought/oversold readings) or trading volume (to confirm breakout strength). As with all indicators, a price touching a band is a signal to investigate, not an automatic trade trigger.
Related terms
See also moving average, volatility, and technical analysis.