Bollinger Bands
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Definition
Bollinger Bands plot a moving average (typically 20-period SMA) with an upper and lower band set a number of standard deviations (typically 2) above and below it, creating a volatility-adaptive envelope around price.
How to read it
The bands widen when volatility rises and contract when it falls. Price tends to spend ~90%+ of time inside the bands with default settings. Tags of the upper band indicate strength/short-term stretch; tags of the lower band indicate weakness/short-term stretch. A 'squeeze' (very narrow bands) signals compressed volatility that often precedes an expansion move. The middle band (the 20 SMA) acts as a mean-reversion target and dynamic support/resistance.
How practitioners use it
Used as context among multiple indicators — never as a standalone signal to act.
Less common professional uses
Fading band tags in a trending regime is a classic failure mode: 'walking the band' will stop out mean-reversion traders repeatedly. Condition the tactic on a trend filter (e.g. ADX) before choosing fade vs. follow. Bands are descriptive, not predictive: 2-sigma assumes a rough normality that fat-tailed returns violate, so band breaks are more frequent than a Gaussian implies. Combine with %B and Bandwidth to quantify position-within-band and squeeze objectively rather than eyeballing.
Sources & provenance
Bollinger 1980s; Bollinger on Bollinger Bands 2001
This page is educational content published by Pachira Aquatica Global LLC. It is not investment advice and not a recommendation.