Key takeaways
- Bollinger Bands are a 20-period simple moving average with bands two standard deviations above and below it.
- The bands widen when volatility rises and narrow when it falls.
- Price touching a band shows that price is high or low relative to the recent average, not that it must reverse.
- A squeeze highlights low volatility but does not reveal the direction of the next move.
Contents
Bollinger Bands, created by John Bollinger in the 1980s, are a volatility indicator drawn directly on the price chart. They show whether prices are relatively high or low compared with their recent average, and how much prices have been fluctuating. Unlike RSI or MACD, they adapt automatically to changing market volatility.
How Bollinger Bands are calculated
The standard settings use 20 periods and 2 standard deviations:
- Middle band = 20-period simple moving average (SMA) of closing prices
- Upper band = middle band + (2 × standard deviation of the same 20 closes)
- Lower band = middle band − (2 × standard deviation of the same 20 closes)
Standard deviation measures how widely the 20 closing prices are spread around their average. When prices swing a lot, the standard deviation grows and the bands widen. When prices are calm, the bands contract. If you need a refresher on the SMA, see Moving Averages.
What "two standard deviations" means here
You may read that about 95% of prices fall within the bands. That figure comes from the normal distribution, but market returns are not normally distributed, so the share of closes inside the bands varies from pair to pair and period to period. Treat the bands as a relative guide, not a statistical guarantee.
Worked example
Assume, for illustration, that on a daily EUR/USD chart the 20-period SMA is 1.0850 and the standard deviation of the last 20 closes is 0.0030.
- Upper band: 1.0850 + (2 × 0.0030) = 1.0850 + 0.0060 = 1.0910
- Lower band: 1.0850 − 0.0060 = 1.0790
- Distance between bands: 1.0910 − 1.0790 = 0.0120 = 120 pips
Two useful derived measures:
- Bandwidth = (upper − lower) ÷ middle = 0.0120 ÷ 1.0850 ≈ 0.0111, or about 1.11%. Comparing bandwidth over time shows whether volatility is expanding or contracting.
- %B shows where price sits within the bands: %B = (price − lower) ÷ (upper − lower). If price is 1.0895, %B = (1.0895 − 1.0790) ÷ 0.0120 = 0.0105 ÷ 0.0120 = 0.875. A value of 1 means price is at the upper band, 0 at the lower band, and values above 1 or below 0 mean price is outside the bands.
You can convert band distances into money for a given position size with the Pip Calculator.
How traders use Bollinger Bands
Relative highs and lows
Price near the upper band is high relative to the recent average; price near the lower band is relatively low. In a range, some traders look for reversals near the bands, ideally where they line up with horizontal support or resistance.
Walking the bands
In strong trends, price can ride along the upper band (uptrend) or lower band (downtrend) for many candles. This is a sign of persistent momentum. Selling every touch of the upper band in a strong uptrend can be costly.
The squeeze
When the bands narrow to their tightest width in months, volatility is unusually low. Quiet periods are often followed by more active ones, so traders watch for a breakout. The catch: the squeeze tells you nothing about which way price will break. False breakouts in one direction before a move in the other are common.
Reversion to the middle band
After price stretches far from the middle band, it frequently drifts back toward it, especially in ranges. In trends, the middle band can act as dynamic support or resistance on pullbacks.
Adjusting the settings
Some traders use a 10-period SMA with 1.5 standard deviations for faster charts, or a 50-period SMA with 2.5 standard deviations for longer-term views. Changing the settings changes how often price touches the bands; it does not make the bands predictive.
Common mistakes
- Treating a band touch as a reversal signal. A touch only shows price is stretched relative to the recent average.
- Guessing the breakout direction from a squeeze. Wait for price to show its hand, and use a stop in case it reverses.
- Ignoring the trend. Mean-reversion ideas work better in ranges than in strong trends.
- Assuming the bands contain a fixed percentage of prices. Real markets have fatter tails than the normal distribution.
- Using bands in isolation. Combine them with price structure or a momentum tool such as the RSI indicator.
Summary
Bollinger Bands place a 20-period SMA in the middle and bands two standard deviations above and below it. They widen when volatility rises and narrow when it falls. Traders use them to judge relative highs and lows, spot squeezes, and recognize strong trends where price walks the bands. A touch, a squeeze or a break of a band describes current conditions; none of them guarantees the next move. Next, Fibonacci Retracement offers a way to map potential pullback zones.
Glossary terms in this lesson
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Practice worksheet
Practice worksheet
5 exercises to try on paper. Print it, save it as a PDF from the print dialog, or download a plain-text copy.
- With a middle band of 1.2700 and a standard deviation of 0.0045, calculate the upper and lower bands.
- Using your answer above, calculate the band width in pips.
- Calculate %B if price is 1.2655 with the bands from the first exercise.
- On a daily chart, find a period when price walked along the upper band for at least five candles. What was the trend doing?
- Find a Bollinger squeeze on any pair and record which direction price broke and how far it traveled over the next 10 candles.
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