Bollinger Bands explained: the squeeze, band walks and mean reversion

Bollinger Bands were developed by John Bollinger in the 1980s. They place a band above and below a moving average at a distance set by recent volatility, so the bands widen when prices swing more and narrow when the market goes quiet.

How the bands are calculated

The default settings are 20 periods and 2 standard deviations:

• Middle band: the 20-period simple moving average of closing prices
• Upper band: the middle band plus 2 × the standard deviation of the last 20 closes
• Lower band: the middle band minus 2 × that standard deviation

Standard deviation measures how spread out prices are around their average. Because it grows with volatility, the bands adapt on their own: a quiet Asian session produces tight bands, while a payrolls release can blow them wide open.

Three things traders watch

The squeeze

When the bands contract to their narrowest in months, volatility is unusually low. Quiet periods tend not to last, so a squeeze warns that a bigger move may be coming. It doesn't say which direction. Traders usually wait for a close outside the bands or a break of a range.

Walking the band

In a strong trend, price can hug the upper or lower band for many candles. Repeated touches of the upper band in an uptrend show strength, not an automatic reason to sell. Selling every touch in a trend is one of the most common ways to lose money with this indicator.

Reversion to the middle

In a range, price that stretches to one band often drifts back toward the middle band. That works while the range holds and fails badly when a breakout starts, so range traders need a stop beyond the band and a clear idea of when the range is over.

Practical notes

• A close outside a band is information, not a signal. Combine it with levels, candle patterns or a trend filter.
• The bands are calculated from closes, so wicks often poke through them. A close back inside can matter more than the poke.
• Bandwidth, the distance between the bands divided by the middle band, turns the squeeze into a number you can compare with earlier periods.
• Changing the multiplier from 2 changes how often price leaves the bands. Keep the default until you have a tested reason to change it.

Bollinger Bands pair naturally with a volatility-based stop such as average true range, because both measure how far price normally moves.