Bollinger Bands are a technical analysis tool developed by John Bollinger in the 1980s that plots three lines on a price chart: a middle band (typically a 20-period simple moving average), an upper band (middle band + 2 standard deviations), and a lower band (middle band − 2 standard deviations). The bands dynamically expand and contract based on market volatility: wide bands indicate high volatility; narrow bands indicate low volatility. Statistically, approximately 95% of price action should occur within the bands, so price touching or exceeding the bands is a notable event.
Key Bollinger Band signals: Bollinger Band Squeeze — when the bands compress to their narrowest point, it signals a period of unusually low volatility that historically precedes a significant breakout (direction unknown); traders watch for the squeeze then trade the breakout direction with confirmation; Upper band touch — in a ranging market, touching the upper band signals overbought conditions and a potential pullback; in a strong trend, price can “walk the band” along the upper boundary; Lower band touch — potential oversold signal in ranging conditions; %B indicator — shows where price is relative to the bands (above 1 = above upper band; below 0 = below lower band); and Bandwidth — measures band width as a percentage of the middle band. Bollinger Bands are most effective when combined with other indicators like RSI or volume.
Example: Bitcoin’s weekly Bollinger Bands compress to their narrowest in 18 months, signalling a major move incoming. The price breaks upward with strong volume. Traders who positioned for the squeeze breakout capture the initial 25% move in 2 weeks.
Learn more: BollingerBands.com — Official Site
