Bollinger Bands

What are Bollinger Bands?

Bollinger Bands are a volatility indicator that places a moving average between two lines offset by a multiple of price standard deviation. John Bollinger’s conventional configuration uses a 20-period simple moving average with bands two standard deviations above and below it, so the bands widen when recent prices disperse and narrow when they settle.

The middle band describes the average. The distance from the middle to either outer band describes the selected multiple of dispersion. Read those measurements together with the current price.

How are Bollinger Bands calculated?

The bands use the same 20 closing prices as the simple moving average, through the current completed bar.

Middle = SMA(20). Upper = middle + 2 × standard deviation. Lower = middle − 2 × standard deviation.

With a mean of $80 and standard deviation of $2.50, the upper band is $85 and lower band is $75. Compare each completed close with bands that include it; here the $84.50 close sits inside the $75 to $85 bands.

Bollinger Band %B and BandWidth

%B = (price − lower band) / (upper band − lower band), using positive band width. A $84.50 close between $75 and $85 gives %B 0.95.

Raw width is upper minus lower. Normalized BandWidth divides raw width by a positive middle band; multiply by 100 to express it as a percentage. The example gives $10 / $80 = 12.50%.

Raw width moves with standard deviation at a fixed multiplier; normalized BandWidth divides by the middle band, so it moves with the price level too.

Bollinger Band squeeze and breakout setups

A squeeze is BandWidth compressed to the low end of its history. Trade the break that ends it, with the stop on the far side of the squeeze range.

The chart contracts to 2.14% BandWidth at bar 6 before expanding to 12.50% at bar 13, ending on the worked example’s $75, $80 and $85 bands.

For a breakout setup, pair the compression condition with a defined price event. For a trend setup, specify how repeated closes near the upper or lower band qualify the trade. Write the trigger as one event, a touch, a close outside or a return inside, because each fires on a different bar.

How traders use Bollinger Bands

Define the decision bar, entry, invalidation, size and exit. Use the option’s own expiration and volatility inputs when moving from the underlying price setup to a contract.

Options Flow shows the large orders in the ticker, and the Options Profit Calculator compares structures around the target, expiration and volatility.

Limitations of Bollinger Bands

• In a strong trend price rides the upper or lower band for many bars, so a %B near 1 calls for a trigger before a fade, such as a close back inside the band.
• Watch the window’s edges. The bands follow a rolling average and standard deviation, so one large bar widens them when it enters and shifts them again when it drops out 20 bars later.
• Take direction from the break. A squeeze marks low dispersion, and the close beyond the range sets the side of the trade.
• Match the lookback, multiplier, price input, standard-deviation convention and current-bar handling before comparing two charts; each one moves the bands.
• Read normalized BandWidth with the price level beside it, since the middle band sits in its denominator; across instruments and long periods, the same dispersion prints different readings.

Bottom line

Bollinger Bands show where price sits relative to its recent average and how wide recent dispersion has been. Use %B for location and BandWidth for compression, and act on a band reading when a defined trigger fires, such as a close outside the band or a return inside it.