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Bollinger Bands is a technical indicator developed by John Bollinger in the 1980s, consisting of three lines: middle band (moving average), upper band, and lower band. Upper and lower bands are calculated based on standard deviation of price, dynamically adjusting to reflect market volatility. Bollinger Bands can simultaneously measure trend, volatility, and relative price levels.
Middle Band = N-period Simple Moving Average (SMA) Upper Band = Middle Band + (K × N-period Standard Deviation) Lower Band = Middle Band - (K × N-period Standard Deviation) Standard parameters: N = 20 (period) K = 2 (standard deviation multiplier) Standard Deviation = √[Σ(Price - SMA)² / N]
Standard Bollinger Bands (20, 2): Most commonly used parameters, suitable for most markets
Narrow Bollinger Bands (20, 1): More sensitive, narrower bandwidth, suitable for low volatility markets
Wide Bollinger Bands (20, 3): More conservative, wider bandwidth, reduces false breakouts
Bollinger Band Width (BBW): Measures distance between upper and lower bands, reflects volatility
Bollinger %B: Shows relative position of price within bands, ranges 0-1
Bollinger Band Squeeze: Decreasing volatility, typically signals imminent large move or breakout
Bollinger Band Expansion: Increasing volatility, trend may be forming or accelerating
Price Touching Upper Band: Possibly overbought, but in strong uptrend price may ride upper band
Price Touching Lower Band: Possibly oversold, but in strong downtrend price may ride lower band
Bollinger Band Breakout: Price breaking above upper or below lower band may continue in breakout direction
Middle Band Support/Resistance: Middle band often acts as dynamic support (uptrend) or resistance (downtrend)
W-Bottom and M-Top: Reversal patterns formed by price within Bollinger Bands
Bollinger Bands excel in ranging markets where counter-trend trades can be considered when price touches bands. In trending markets, breakouts after band squeeze often mark beginning of strong trends. Bollinger Band Width (BBW) quantifies volatility, helping select appropriate trading strategies. Many traders combine Bollinger Bands with RSI or MACD, seeking confirmation from other indicators when price touches band edges.
Simultaneously displays trend, volatility, and price levels; automatically adapts to market volatility; provides dynamic support/resistance; band squeeze predicts breakouts; applicable to various trading strategies
In strong trends price may ride band edge for extended periods; band breakouts may be false signals; standard deviation parameters need market-specific adjustment; limited reliability when used alone
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