Glossary
Bollinger Bands
Bands set two standard deviations above and below a 20-period moving average, widening and narrowing with volatility.
Bollinger Bands are a chart overlay made of three lines: a simple moving average in the middle and two bands placed a set number of standard deviations above and below it. John Bollinger developed them in the 1980s. Because the distance between the bands depends on recent volatility, they widen when prices swing hard and contract when markets go quiet, giving a self-adjusting sense of what counts as a high or low price for that stock right now.
How they are calculated
20 periods and 2 standard deviations are the standard settings.
How traders read them
- Touches are not signals by themselves. In a strong uptrend, prices can "walk the band," closing near the upper band day after day. Bollinger himself cautioned against treating a tag of the band as an automatic sell.
- Squeezes. Unusually narrow bands mark low volatility, which has often preceded a larger move, though the band says nothing about its direction.
- Mean reversion in ranges. In sideways markets, moves to the outer bands have tended to fade back toward the middle.
Even if prices were normally distributed, about 5% of closes would fall outside 2 standard deviations; with real fat-tailed prices, breaks are more frequent in trending phases.