Bollinger Bands

Bollinger Bands, devised by John Bollinger in the 1980s, are an envelope that adapts to current market volatility. The middle line is a simple moving average. The upper and lower bands sit a multiple of the recent price standard deviation above and below.

Because they expand when the market becomes volatile and contract when it quiets, Bollinger Bands offer a self-tuning way to think about "extremes." A price touch of the upper band in a sleepy market is a different statistical event than the same touch during a high-volatility regime — the bands automatically account for this.

Three parameters: period (default 20), multiplier (default 2.0), and the moving-average type (typically SMA).

1. Middle band = SMA(close, period) 2. Standard deviation σ = stdev(close over the same period) 3. Upper band = middle + (multiplier × σ) 4. Lower band = middle − (multiplier × σ)

With a 2σ multiplier on a normally distributed series, roughly 95% of price action falls inside the bands. Markets are not normally distributed (they have fat tails), so band touches are more common than naive statistics suggest, but the bands still capture relative extremes.

Three primary readings:

Mean reversion. Price touching or piercing the upper band in a non-trending market often precedes a pullback toward the middle. Touch of the lower band similarly often precedes a bounce up. This is the foundation of most "BB Bounce" strategies.

Volatility squeeze. When the bands narrow tightly together, volatility is unusually low. Markets rarely stay quiet for long, so squeezes often precede sharp directional moves — though the bands themselves do not predict direction.

Bands as trend. In strong trends, price can ride the upper band (uptrend) or lower band (downtrend) for many bars. A trend that loses contact with its band hints at fading momentum.