Introduction
Bollinger Bands are one of the most widely used tools in technical analysis, helping traders visualize volatility and identify potential breakout opportunities. Created by market technician John Bollinger in the early 1980s, these bands have become a staple for traders across markets—from stocks and forex to commodities and crypto.
In this guide, we’ll explain what Bollinger Bands are, how they work, and two popular ways to use them in your trading strategy.
What Are Bollinger Bands?
At a basic level, Bollinger Bands consist of three lines:
- A middle line, which is a simple moving average (typically set to 20 periods)
- An upper band, which is the moving average plus two standard deviations
- A lower band, which is the moving average minus two standard deviations
These bands automatically adjust based on market volatility. When prices are calm, the bands contract. When prices are volatile, the bands expand.
Why Use Bollinger Bands?
Bollinger Bands are popular because they provide a clear visual representation of how much a security's price is moving. They're especially useful for:
- Identifying overbought or oversold conditions
- Spotting trend reversals
- Detecting breakout setups
- Measuring market volatility
Traders often use Bollinger Bands in combination with other indicators, such as RSI or the Keltner Channel, for better confirmation of entry and exit points.
The "Bollinger Squeeze": A Common Strategy
One of the most well-known Bollinger Band strategies is the Bollinger Squeeze. This occurs when the upper and lower bands move closer together, or "squeeze," indicating low volatility. A squeeze often precedes a significant price breakout—up or down—making it a powerful signal for active traders.
Watch for volume spikes or confirmation from momentum indicators to validate the direction of the breakout.
Bollinger Bands vs. Moving Average Envelopes
While Bollinger Bands and moving average envelopes look similar, there’s a key difference. Envelopes use a fixed percentage to place bands around a moving average, whereas Bollinger Bands use standard deviation, making them more adaptive to market conditions.
How Are Bollinger Bands Calculated?
To calculate Bollinger Bands:
- Start with a simple moving average (SMA)—commonly 20 periods
- Calculate the standard deviation of the closing prices over the same period
- Plot the upper and lower bands using:
- Upper Band = SMA + (2 × standard deviation)
- Lower Band = SMA - (2 × standard deviation)
This math makes the bands dynamically adjust based on how volatile the market is, which is what gives them their edge.
Real-World Use of Bollinger Bands
Bollinger Bands are used in manual trading and are a core feature in many algorithmic trading systems. Whether you're trading equities, forex, crypto, or ETFs, this indicator can help you navigate sideways markets, confirm breakouts, and manage risk.
Final Thoughts
Bollinger Bands are a must-know for any trader looking to better understand price action and volatility. They're flexible, easy to use, and provide key insights when combined with other tools.
Ready to start using Bollinger Bands? Pull up your favorite charting platform, add the indicator, and start observing how the bands interact with price. Over time, you'll spot patterns and setups that can help sharpen your trading edge.
Keywords included: Bollinger Bands, volatility indicator, technical analysis, Bollinger Squeeze, trading strategies, moving average, breakout trading, algorithmic trading.