Bollinger Bands explained: how to read the bands and the squeeze
Bollinger Bands plot a 20-period moving average with bands two standard deviations above and below it, so the envelope widens and narrows with volatility.
What Bollinger Bands are
Bollinger Bands were developed by the analyst John Bollinger in the early 1980s. They wrap price in an envelope that adapts to volatility: when the market gets jumpy the bands move apart, and when it calms down they contract.
That makes 'high' and 'low' relative. A price near the upper band is high compared with its own recent behaviour, whatever its absolute level — useful when comparing a calm stock with a wild crypto token.
How they are calculated
The standard settings use 20 periods and two standard deviations:
Middle band = SMA(20) Upper band = SMA(20) + 2 × σ(20) Lower band = SMA(20) − 2 × σ(20) %B = (price − lower) ÷ (upper − lower)
σ is the standard deviation of the last 20 closes around their average. Two derived figures help: %B shows where price sits inside the bands (0 = lower band, 1 = upper band), and bandwidth, (upper − lower) ÷ middle, measures how wide the envelope is. Our charts draw the 20-period, 2σ version.
How to read them — a worked example
Suppose the 20-day average is 100 and the standard deviation is 2.5. The bands sit at 100 + 5 = 105 and 100 − 5 = 95, and bandwidth is 10 ÷ 100 = 10%. A close at 104 gives %B = (104 − 95) ÷ (105 − 95) = 0.9 — near the top of the range. If volatility then collapses and the bands narrow to 98–102 (bandwidth 4%), traders call it a squeeze.
In ranges, a price that tags one band often drifts back toward the middle. In trends, repeated closes along the upper band — 'walking the band' — are a sign of strength, not exhaustion. A squeeze says a large move is becoming more likely but not in which direction; the break out of the bands, ideally on rising volume, gives the hint.
Limitations and common mistakes
The most common mistake is treating the bands as automatic buy and sell lines. Price at the upper band is only high relative to the last 20 periods, and in a strong uptrend that can last a long time. Bollinger himself recommended combining the bands with indicators that carry different information, such as volume or momentum.
The statistics are also looser than they look. If returns were normally distributed, about 95% of closes would land inside ±2σ, but market returns have fat tails, so breaks outside the bands happen more often than that suggests. And like any average-based tool, the bands lag: they widen after volatility has already jumped.
Frequently asked questions
What does it mean when price touches the upper Bollinger Band?
Only that price is high relative to its recent average and volatility. In a range it can come before a pullback; in a strong uptrend price often keeps riding the upper band. It is context, not a sell signal.
What is a Bollinger squeeze?
A period when the bands narrow sharply because volatility has dropped to unusually low levels. Low volatility rarely lasts, so a squeeze often comes before a large move — but it doesn't tell you the direction.
What settings should I use?
The standard is 20 periods with 2 standard deviations, which most platforms and our charts use. Bollinger suggested slightly wider bands for longer averages and narrower ones for shorter averages, but the defaults are a sensible starting point.