Bollinger Bands Explained

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Bollinger Bands plot a moving average alongside two bands set a certain distance above and below it, with that distance adjusting automatically based on recent volatility.

Because the bands adapt to changing conditions rather than staying fixed, they're used both to gauge how stretched a move looks and to spot periods where volatility itself is unusually compressed.

How the bands adapt

Because the bands widen during volatile periods and narrow during calmer ones, they give a visual sense of how much price has been moving recently, relative to its own history, rather than using a fixed distance.

This adaptive width is what separates Bollinger Bands from a simple fixed-distance channel - the same instrument's bands will look very different in a quiet range than during a fast-moving trend.

• Middle band: A moving average, usually simple, forming the centre line.
• Standard deviation: The statistical measure used to set how far the outer bands sit from the middle.
• Adaptive width: Bands widen in volatile conditions and narrow in calmer ones.

Price at the edges of the bands

Price touching or moving beyond a band is sometimes read as a sign that a move has become stretched relative to recent volatility, though in a strong trend, price can continue running along a band for an extended period rather than immediately reversing.

This is a common misreading of the indicator - treating a touch of the band as an automatic reversal signal, when in a genuine trend it can just as easily mean the move has real strength behind it.

• Band touch: Not automatically a reversal signal - context and trend strength matter.
• Band walking: Price hugging one band through an extended, strong trend.
• Mean reversion: In range-bound conditions, price often does pull back toward the middle band.

The 'squeeze' as a volatility signal

A period where the bands narrow sharply - often called a 'squeeze' - is generally read as a sign that volatility has compressed and a larger move may be building, though the bands themselves don't indicate which direction that move will take.

Because a squeeze only signals that a bigger move is more likely, not which way it will break, traders often pair it with another tool - such as a breakout of a nearby support or resistance level - before acting on it.

• Squeeze: A sharp narrowing of the bands, associated with compressed volatility.
• Direction-neutral: A squeeze signals a move is likely, not which direction it will take.
• Confirmation needed: Often paired with a support/resistance breakout before acting.