Bollinger Bands
An envelope two standard deviations around a 20-session moving average, widening when volatility rises.
An envelope that breathes with volatility
Devised by John Bollinger in the 1980s, the bands wrap a 20-session moving average two standard deviations above and below. When volatility rises they widen; when it falls they narrow. A prolonged narrowing (squeeze) often comes before a strong move, without saying which way. A price touching the upper band is not necessarily too expensive: in a strong trend it can ride it for a long time.
- σ
- standard deviation of the last 20 closes.
Computing the bands
- Average of the last 20 closes: 100; standard deviation: 2.5.
- Upper band: 105; lower band: 95.
- Bandwidth: (105 - 95) / 100 = 10%.
If bandwidth drops to 4%, a six-month low, a squeeze is forming.
Common mistakes
- Selling every touch of the upper band in a strong uptrend.
Questions and answers
Why two standard deviations?
If moves followed a normal distribution, about 95% of prices would stay inside the bands. Markets have fatter tails, so breakouts are more frequent.
Notitia newsroom · education, not investment advice.