Bollinger Bands
A technical indicator consisting of a moving average with upper and lower bands based on standard deviation. Bollinger Bands measure volatility and price extremes.
Bollinger Bands
Bollinger Bands consist of a moving average (typically 20-day SMA) and two bands positioned above and below the moving average based on standard deviation. They expand when volatility increases and contract when it decreases.
Formula
Upper Band = 20-day SMA + (2 × Standard Deviation) Middle Band = 20-day SMA Lower Band = 20-day SMA - (2 × Standard Deviation)
The bands adjust dynamically based on recent price volatility. Higher volatility = wider bands; lower volatility = narrower bands.
Example
Apple (AAPL) often trades between its Bollinger Bands. When AAPL rallies and touches or exceeds the upper band, some traders interpret it as overbought and prepare to sell. When AAPL falls and touches the lower band, they see it as oversold and prepare to buy.
How to Interpret It
- Price at upper band: Stock may be overbought; traders watch for a pullback toward the middle band.
- Price at lower band: Stock may be oversold; traders watch for a bounce toward the middle band.
- Band squeeze: When bands narrow sharply, it suggests low volatility. This often precedes a big price move.
- Band expansion: Widening bands signal increasing volatility and momentum in the trending direction.
- Walk the band: In a strong uptrend, price can "walk" along the upper band repeatedly, staying overbought without reversing.
- Midline crossover: Price bouncing off the middle band (20-day SMA) often acts as support or resistance.
Limitations
- Bollinger Bands don't predict direction; they only show relative extremes.
- In strong trends, price can stay at or beyond the bands for long periods without reversing.
- Different settings (20-day, 2 standard deviations) produce different results.
- Band touches don't guarantee reversals; confirmation from other indicators is important.
Related Terms
- Moving Average — the centerline of Bollinger Bands
- Standard Deviation — the measure of volatility behind the bands
- Volatility — price fluctuation magnitude
- Support and Resistance — price levels where Bollinger Bands often act as boundaries