Bollinger Bands, created by John Bollinger in the 1980s, measure price volatility and identify potential overbought/oversold conditions. The bands expand when volatility increases and contract when volatility decreases. This 'breathing' behavior gives traders powerful signals about potential breakouts and mean-reversion opportunities.
Key points
Middle Band = 20-period SMA (the trend). Upper Band = SMA + 2 standard deviations. Lower Band = SMA − 2 standard deviations
~95% of price action occurs within the bands. A close outside the bands is statistically significant — something unusual is happening
Bollinger Squeeze: Bands contract to their narrowest width. This signals low volatility — and low volatility ALWAYS precedes high volatility. A squeeze is a 'coiled spring' ready to explode
Squeeze Breakout: After a squeeze, price breaking above the upper band with volume = bullish breakout. Below lower band = bearish breakdown
Walking the Band: In strong trends, price can 'walk' along the upper band (uptrend) or lower band (downtrend) for extended periods. Don't blindly sell at upper band in uptrends
Mean Reversion: In range-bound markets, price touching the upper band and reversing = potential short. Touching lower band = potential buy. Only works in sideways markets
Band Width: The percentage difference between upper and lower bands. Historically low band width = squeeze forming = expect a big move soon
%B Indicator: Shows where price is relative to the bands. %B > 1 = above upper band. %B < 0 = below lower band. %B = 0.5 = at middle band (SMA)
Formula
Upper Band = SMA(20) + 2σ | Lower Band = SMA(20) − 2σ | where σ = standard deviation of closing prices
Pro tip — The Bollinger Squeeze is one of the most reliable pre-breakout signals. When you see bands narrowing on a weekly chart of a quality stock, start watching closely. Combine with volume analysis — a squeeze breakout on 2x volume is a high-conviction swing trade setup.