Bollinger Bands are the two lines that wrap around the price on so many charts, widening when the market gets nervous and narrowing when it calms down. They are simple to build and easy to misread. This guide explains what they show and what they do not.
How they are built
John Bollinger developed them in the 1980s. They have three lines:
- Middle band: the average close of the last 20 sessions.
- Upper band: the middle band plus two standard deviations of those 20 closes.
- Lower band: the middle band minus two standard deviations.
The standard deviation measures how far the closes have been from their average. When prices swing a lot, it grows and the bands move apart. When prices barely move, it shrinks and the bands come together.
That is why the usual setting is written as (20, 2): 20 sessions and 2 standard deviations. It is the one we use in the 360 Analysis.
What the bands tell you
1. How volatile the stock is right now. Wide bands mean large daily swings; narrow bands mean a quiet stock. You can compare a stock with its own past: bands much narrower than usual describe an unusually calm period.
2. Where the price sits within its recent range. A close near the upper band is high compared with the last few weeks; a close near the lower band is low. Many tools turn this into a number from 0 (on the lower band) to 1 (on the upper band).
3. When a move is out of the ordinary. Most closes fall between the two bands, so a close outside them is an unusual event, in one direction or the other.
The most common misreading
The temptation is to treat the bands as walls: sell at the upper band, buy at the lower one. It sometimes works in a market that moves sideways, and it fails badly in a trend.
In a strong uptrend the price can "walk along" the upper band for weeks, touching it again and again. Selling at every touch means leaving the trend at the beginning. In a strong downtrend the same happens along the lower band: buying every touch means buying all the way down.
A band touch says that the move is strong. Whether that strength continues or fades depends on the trend and on the context, not on the band.
- 1In the rise the price "walks" along the upper band: it shows strength, not a reason to sell.
- 2Sideways, the price swings from band to band, and the bands widen as the swings grow.
The squeeze
When the bands become much narrower than usual, traders talk about a squeeze. Calm periods in markets tend to be followed by more active ones, so a squeeze often comes before a larger move.
What the squeeze does not tell you is the direction of that move. That is why it is usually combined with something else: the break of the range, the trend, or the volume.
- 1Weeks of calm: the bands come much closer together than usual. That is the squeeze.
- 2A larger move follows the calm. The squeeze did not say which way: here it was up.
How we use Bollinger Bands at InbestPlanners
1. In one of the Impulse rules. An Impulse signal can come from a breakout confirmation: the close rises above the upper band, volume that day is unusually high for that stock, and the price is above its 200-session average. The combination matters: a close above the band alone is common in any rally, while a close above the band with exceptional volume suggests broad participation in the move.
2. As context in the analysis. The 360 Analysis shows where the price sits within its bands and how wide they are, and the technical ranking includes the band position as one of eight indicators.
The Bounce method does not use the bands: it measures a sharp drop with a two-session RSI inside a long-term uptrend. You can read about it in What Is RSI and How to Use It, and the full rules are on the methodology page.
Four practical tips
1. Look at the trend first. The same touch of the upper band means one thing in an uptrend and another in a sideways market.
2. Compare the width with the stock's own history. "Narrow" or "wide" only makes sense against how that stock usually behaves.
3. Confirm with volume. A break of the band with ordinary volume is weaker evidence than one with exceptional volume.
4. Do not expect symmetry. Prices do not follow a perfect bell curve, so the bands are a rough guide to "normal", not a statistical guarantee.
In short
- The bands are a 20-session average with a margin of two standard deviations above and below.
- Their width measures volatility; the position of the price within them measures where it sits in its recent range.
- A touch is a sign of strength, not a turning point.
- A squeeze announces activity, not direction.
This content is for educational purposes only and does not constitute financial advice. Past performance does not guarantee future results.