Bollinger Bands

The Bollinger Bands indicator is one of the most popular and visually intuitive tools for measuring volatility. Created by John Bollinger in the 1980s, this indicator helps traders understand whether price is high, low, or somewhere in between—relative to recent market activity.

Unlike many indicators that lag behind price, Bollinger Bands adapt in real time. As volatility expands, the bands widen. When volatility shrinks, the bands contract. This makes them extremely useful for spotting periods of compression before explosive breakouts or identifying when price might be stretched too far.

How Bollinger Bands Work

Bollinger Bands consist of three simple elements:

A middle line: a 20-period Simple Moving Average (SMA)
An upper band: the SMA plus 2 standard deviations
A lower band: the SMA minus 2 standard deviations

These bands form a dynamic envelope that expands and contracts based on market volatility.

Here’s a quick breakdown:

When price moves toward the upper band, it may be overbought. When it approaches the lower band, it may be oversold. But Bollinger Bands aren’t just about extremes—they’re also great for spotting potential breakout setups.

Bollinger Bands Table

Band Component	What It Represents
Middle Band	20-period SMA (trend baseline)
Upper Band	SMA + 2 standard deviations (price ceiling)
Lower Band	SMA – 2 standard deviations (price floor)

How Traders Use It

Bollinger Bands are incredibly versatile. Some traders use them for mean reversion, others for trend continuation or breakout entries.

Here’s how they’re commonly applied:

Price Reversals:

If price touches the upper band and shows signs of rejection, some traders fade the move and go short. The opposite applies at the lower band.

Volatility Squeeze:

When the bands tighten or “squeeze” together, it often signals a buildup in pressure. A breakout is usually on the way.

Trend Riding:

In strong trends, price can “walk the band.” Rather than fading it, traders use this to ride the momentum.

Example Setup

Let’s say you’re watching a crypto chart and notice that the Bollinger Bands have narrowed significantly. Price has been moving sideways and volume is drying up.

That’s a classic squeeze.

Suddenly, price breaks above the upper band with strong volume. That’s your signal. You enter long and use the middle band (20 SMA) as your dynamic trailing stop. As long as price stays above it and the bands keep expanding, the trend is alive.

Alternatively, if price touches the upper band but closes with a bearish reversal pattern, that might be a short opportunity.

Pros and Cons of Using Bollinger Bands

Pros

Adapts in real time to market volatility
Great for identifying overbought and oversold conditions
Excellent for breakout strategies
Easy to combine with price action or volume

Cons

Not a standalone entry tool—needs confirmation
Can give false reversal signals during strong trends
May require adjusting standard deviation settings per asset

When to Use Bollinger Bands

Bollinger Bands shine in two key environments—during volatility squeezes and price extremes. If you want to catch breakout moves before they happen or identify when the market has moved too far too fast, this indicator belongs on your chart.

It works best when used with supporting tools like RSI, MACD, or volume to confirm whether the breakout has real strength or if a mean-reverting pullback is more likely.

Whether you’re trading crypto, forex, or stocks, the Bollinger Bands give you a reliable way to see when the market is quiet, when it’s loud, and when it’s ready to explode. Next up you can learn the Keltner Channels