Bollinger Bands measure volatility by placing bands two standard deviations above and below a moving average. Learn how to read squeezes, breakouts, and band walks — and avoid the most common misinterpretations.
Bollinger Bands were created by John Bollinger in the early 1980s and published in his 2001 book Bollinger on Bollinger Bands. The concept is elegant: place two bands a defined number of standard deviations above and below a moving average. As volatility increases, the bands widen; as volatility contracts, they narrow. The bands are a volatility envelope — they tell you not where a stock will go, but how stretched or compressed its recent price action has become.
The standard Bollinger Band settings are:
Statistically, price should close inside the bands roughly 95% of the time under a normal distribution. Closes outside the bands are significant — but not necessarily reversals. They indicate price has moved far from its recent average, which can signal either exhaustion or the start of a powerful directional move.
The most actionable Bollinger Band signal is the squeeze: a period where the bands narrow significantly, indicating that volatility has contracted to unusually low levels.
Volatility expands and contracts in cycles. After a prolonged low-volatility period (squeeze), an expansion is likely coming — though the direction is not predetermined by the squeeze itself. A squeeze does not tell you which way price will break; it tells you that a large move is building.
The practical use: identify stocks in a Bollinger Band squeeze, monitor the breakout direction when it comes, and use volume as the confirming signal. A breakout from a squeeze on expanding volume is significantly more reliable than one on light volume.
In strong trending markets, prices can "walk the band" — repeatedly touching or slightly exceeding the upper band while the middle band rises below them. This is the signature of a powerful uptrend, not a reversal signal.
A common mistake is interpreting a touch of the upper Bollinger Band as a sell signal. Bollinger himself was clear: a price touching or briefly exceeding the upper band is not a sell signal in isolation. In a strong trend, the upper band acts as a target or a sign of strength, not an automatic reversal zone.
Bollinger specifically recommends not using the bands in isolation. His suggested pairings:
Sources & References
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