Bollinger Bands

Bollinger Bands are a technical indicator designed to show whether prices are relatively high (overbought) or relatively low (oversold). They were developed by the analyst John Bollinger in the early 1980s and are among the most widely used tools in technical analysis.

How Bollinger Bands are calculated

The indicator consists of three lines:

• Middle band: a simple moving average (SMA), usually over 20 periods (SMA 20).
• Upper band: the middle band plus two standard deviations.
• Lower band: the middle band minus two standard deviations.

The standard deviation measures how widely prices fluctuate around their average. When volatility is low, the bands lie close to the price; when volatility rises, they move further apart.

Example: if the 20-day average of a share is $100 and the standard deviation is $2, the upper band is at $104 and the lower band at $96. If the standard deviation doubles to $4 after a turbulent period, the bands widen to $108 and $92.

Why Bollinger Bands matter for traders

Bollinger Bands put price moves into context. A price near the upper band is relatively high compared with recent trading, and a price near the lower band is relatively low. This is not automatically a trading signal, however: in strong trends, prices can move along one of the bands for a long time. Many traders also watch for a "squeeze" – a phase in which the bands narrow sharply – because periods of low volatility are often followed by stronger moves. As with any indicator, Bollinger Bands work best in combination with other tools, such as the RSI or price patterns.