Bollinger Bands

A moving average wrapped in volatility-based bands that widen and narrow as price action calms or churns.

What it is

Bollinger Bands are a volatility indicator developed by John Bollinger. They consist of three lines plotted on the price chart: a middle band (a simple moving average, by default over 20 periods) and an upper and lower band placed a set number of standard deviations away from that average (by default 2). Because the bands are derived from the standard deviation of price, they expand when price becomes more volatile and contract when it becomes calmer. They are an educational analysis tool only, not a buy/sell system, and no indicator can predict future price. All trading carries risk of loss.

How it works

The middle line is a simple moving average of recent closing prices, which smooths out short-term noise to show the general direction. The upper and lower bands are then drawn by measuring how spread out recent prices have been (the standard deviation over the same lookback) and shifting the average up and down by a multiple of that spread, usually two times. When recent prices swing widely, the standard deviation grows and the bands move farther apart; when prices stay in a tight range, the standard deviation shrinks and the bands squeeze together. So the distance between the bands is essentially a running picture of recent volatility, while the middle line tracks the average. All of this is calculated from past closes, so the bands describe what has already happened rather than forecast what comes next.

How traders read it

• Band width reflects recent volatility: traders often read widening bands as a higher-volatility period and narrowing bands (a 'squeeze') as a quieter phase. A squeeze says nothing about future direction.
• Price near a band is not an automatic signal. A touch of the upper or lower band is often interpreted as price being statistically stretched relative to its recent average, not as an instruction to act.
• In a strong trend price can 'walk the band', hugging one side for extended stretches, so repeated touches do not by themselves mean a reversal is due.
• The middle band is sometimes used as a reference for the recent average or as a rough dynamic support/resistance area in range-bound conditions, though such levels can fail at any time.
• Many traders combine the bands with other tools (volume, trend filters, price structure) rather than reading them in isolation.
• The bands describe past price behaviour; they are descriptive, not predictive, and all trading carries risk of loss.

Common settings

Length 20 with a 2.0 standard-deviation multiplier on closing price is the classic default. Shorter lengths (e.g. 10) react faster but are noisier; longer lengths (e.g. 50) are smoother but slower. Some traders adjust the multiplier (e.g. 1.5 to 2.5) to make band touches more or less frequent. These are conventions, not recommended values.

Strengths

• Combines an average (the moving average) and volatility (the band spread) in a single, easy-to-read overlay.
• Adapts automatically to changing volatility, so the same settings stay readable across calm and active periods.
• Visually intuitive, which makes squeezes, expansions and band 'walks' easy to spot at a glance.
• Widely used and well documented, so its behaviour is familiar and easy to study or pair with other tools.

Pitfalls to watch

• Band touches are frequently misread as reversal signals. In trending markets price can ride a band for a long time, so 'price hit the upper band' alone is not evidence of a turn.
• A squeeze indicates low recent volatility, not direction. It can be followed by a move either way, or by continued quiet, so it should not be treated as a directional forecast.
• Bollinger Bands lag, because both the moving average and the standard deviation are based on past closes. They react to volatility changes rather than anticipate them.
• Default settings (20 period, 2 standard deviations) are conventions, not optimal values. Behaviour differs across instruments and timeframes, and tuning settings to past data can flatter results that do not repeat (curve-fitting).
• No indicator is predictive. Using bands in isolation, without risk management or confirmation, can lead to over-trading and losses.

Pine v6 example

//@version=6
indicator("Bollinger Bands", overlay = true)

length = input.int(20, "Length", minval = 1)
mult   = input.float(2.0, "StdDev Multiplier", minval = 0.1)
src    = input.source(close, "Source")

basis = ta.sma(src, length)
dev   = mult * ta.stdev(src, length)
upper = basis + dev
lower = basis - dev

plot(basis, "Basis", color = color.orange)
p2 = plot(upper, "Upper", color = color.teal)
p3 = plot(lower, "Lower", color = color.teal)
fill(p2, p3, color = color.new(color.teal, 90), title = "Background")

Pro tip: Watch the band width itself, not just where price sits. A prolonged squeeze tells you recent volatility is unusually low, and historically such periods have sometimes preceded larger moves, but it gives no clue about direction or timing. Treat any subsequent breakout as something to confirm with other evidence and proper risk control, never as a guarantee.

Educational only — not financial advice, not a recommendation to trade. No indicator is predictive; trading involves substantial risk of loss.