CluenexWhat are Bollinger Bands?
Bollinger Bands are three lines drawn on a price chart: a simple moving average in the middle and two bands above and below it. They were created by the analyst John Bollinger in the 1980s and are one of the most widely used volatility indicators.
The standard setting is written BB(20,2): a 20-period average and bands 2 standard deviations away. On a daily chart, a period is one trading day.
A standard deviation is a measure of how spread out numbers are around their average. When recent prices swing a lot, the standard deviation is large and the bands widen. When prices barely move, the bands narrow.
How are Bollinger Bands calculated?
The middle band is the average of the last 20 closing prices. The upper band is that average plus 2 times the standard deviation of those same 20 closes. The lower band is the average minus 2 times the standard deviation.
Worked example with simple numbers: suppose the 20-day average close is $100 and the standard deviation of those closes is $3. Upper band = 100 + (2 x 3) = $106. Lower band = 100 - (2 x 3) = $94.
If volatility doubles and the standard deviation becomes $6, the bands move to $112 and $88 even though the average is unchanged. That is all the bands do: they translate recent volatility into a price range.
| Line | Formula | What it shows |
|---|---|---|
| Middle band | 20-period simple moving average | Short-term trend |
| Upper band | Middle + 2 x standard deviation | Unusually high price relative to the last 20 periods |
| Lower band | Middle - 2 x standard deviation | Unusually low price relative to the last 20 periods |
What is a Bollinger Band squeeze?
A squeeze is a period when the bands are unusually close together, meaning recent volatility is low compared with its own history. Traders watch for it because quiet periods are often followed by more active ones.
The key word is often. A squeeze says a larger move is more likely than usual, but it does not say whether price will rise or fall, and some squeezes simply fade into more quiet trading.
Band width is a common way to measure this. It is (upper band minus lower band) divided by the middle band. Compare today's band width with its own past six months or so, since a narrow band for one stock may be normal for another.
What does it mean when price touches or closes outside a band?
A touch of the upper band means price is high relative to its last 20 periods. It does not mean the stock is overvalued or that a drop is coming.
In a strong uptrend, price can stay near the upper band for many days. Bollinger himself describes this as "walking the bands", a sign of strength rather than a reversal. In a sideways market, the same touch is more often followed by a move back toward the middle band.
So the first question is always the trend. Is the middle band sloping up, down or flat? The answer changes how a band touch should be read.
| Situation | Possible reading |
|---|---|
| Middle band sloping up, price near upper band | Strong trend, may continue |
| Middle band flat, price at upper band | Stretched in a range, may drift back |
| Middle band sloping down, price near lower band | Strong downtrend, may continue |
| Bands very narrow | Low volatility, larger move more likely, direction unknown |
| Bands widening fast | Volatility rising, often after news or a breakout |
Do 95% of prices really stay inside the bands?
No, not reliably. The 95% figure comes from the normal distribution (the bell curve), where about 95% of values fall within 2 standard deviations. Stock returns are not perfectly bell shaped: they have fat tails, meaning extreme moves happen more often than the bell curve predicts.
In practice, the share of closes inside the bands changes by stock and by period. Treat 2 standard deviations as a convenient yardstick, not a probability promise.
What are the limits of Bollinger Bands?
The bands describe the past 20 periods. They do not forecast, and they are a lagging tool built from price alone, so they know nothing about earnings, debt or the business.
Common mistakes:
- Treating a band touch as a signal to buy or sell. In trends, price can hug a band for weeks.
- Assuming every squeeze leads to a big move. Some squeezes end quietly, and direction is unknown until price moves.
- Quoting win rates. Figures such as "70% of breakouts work" circulate widely, but results depend on the market, the period and the rules used, and they are not published in a reliable primary source. Test any idea yourself before trusting a number.
- Using one setting everywhere. BB(20,2) is a default, not a law. Changing it changes how often the bands trigger, and a better-looking backtest from tweaking settings can be an accident of the past data.
- Ignoring false breakouts. A close outside the band that reverses the next day is common, especially on thin volume.
Standard deviation is also affected by single big days. One large gap can widen the bands for the next 20 periods even after things calm down, so the bands can stay wide long after the news is over.
How do Bollinger Bands compare with Keltner Channels?
Both draw bands around a moving average. Bollinger Bands use standard deviation of closing prices. Keltner Channels use the Average True Range (ATR), which measures the typical daily high-to-low range.
Because standard deviation reacts quickly to a single large move, Bollinger Bands change width faster. Keltner Channels are usually smoother. Neither is better in general: they are two ways to measure the same thing, volatility.
What this means for you
If you have a regular job and a brokerage account, Bollinger Bands are best used as a quick read of how calm or stretched a chart is, not as a trigger to trade.
- Check the slope of the middle band before reading any band touch.
- When bands are unusually narrow, expect a bigger move but do not assume the direction.
- Compare band width with that stock's own history, not with other stocks.
- Do not trust quoted win rates. If you want to test a rule, run it on years of data across many stocks and include trading costs and taxes.
- Check the business first. Price-only tools say nothing about whether a company is cheap or in trouble. Cluenex stock pages at https://cluenex.com/stocks/ show business quality and insider activity beside the chart, and Cluenex treats chart patterns as context, not buy or sell signals, because its own tests found no reliable directional edge in them.
For related tools, see moving averages, volume analysis, breakout vs fakeout and the VIX.