Bollinger Bands, created by John Bollinger, wrap a moving average with two bands set a number of standard deviations away. The bands widen when volatility rises and contract when it falls.
Construction
- Middle band: 20-period SMA
- Upper band: middle band + 2 standard deviations
- Lower band: middle band − 2 standard deviations
Reading the bands
The squeeze. When the bands contract to their narrowest in months, volatility is unusually low. Low volatility tends to be followed by high volatility, so a squeeze often precedes a strong move — but it does not tell you the direction.
Walking the band. In a strong trend, price repeatedly closes near the upper (or lower) band. This is a sign of strength, not exhaustion.
Reversion to the mean. In a range, price tends to rotate between the bands and the middle line.
Two Bollinger Band strategies
Squeeze breakout
- Wait for the band width to reach a multi-month low.
- Enter when a candle closes outside the bands with above-average volume.
- Place the stop at the middle band; trail it as the trend develops.
Range reversion
- Confirm the market is ranging (flat middle band, no trend on the higher timeframe).
- Enter when price closes back inside the band after poking outside it.
- Target the middle band; stop beyond the recent extreme.
A worked calculation
Suppose the 20-period SMA of EUR/USD is 1.0880 and the standard deviation of the last 20 closes is 0.0020 (20 pips).
- Upper band = 1.0880 + 2 × 0.0020 = 1.0920
- Lower band = 1.0880 − 2 × 0.0020 = 1.0840
- Band width = (1.0920 − 1.0840) ÷ 1.0880 ≈ 0.74%
Tracking band width over time is the simplest way to spot a squeeze: mark the lowest reading of the past six months and watch for the bands to approach it.
Settings
| Setting | Effect | Use |
|---|---|---|
| 20, 2.0 | Standard | Most markets and timeframes |
| 20, 2.5 | Fewer touches | Range reversion with stricter signals |
| 10, 1.5 | Tighter, faster | Short-term trading |
| 50, 2.5 | Wider, slower | Longer-term trends |
Example: a squeeze breakout on a stock
A stock’s band width falls to a six-month low. A day later it closes above the upper band at $64.80 on volume well above average. The middle band is at $62.90, so the stop sits there: $1.90 of risk per share. The 2R target is $64.80 + $3.80 = $68.60. Risking $200, the position is 105 shares ($199.50 of risk).
Example: range reversion on EUR/USD
EUR/USD has ranged for two weeks with a flat middle band. A 4-hour candle pokes below the lower band to 1.0832, then the next candle closes back inside at 1.0845. A long entry at 1.0845 with a stop 5 pips below the extreme (1.0827) risks 18 pips; the middle band at 1.0880 is 35 pips away — almost 2R.
Common mistakes
- Fading every band touch in a trending market.
- Guessing the squeeze direction. Wait for the break and a candle close.
- Using the middle band as a target in a strong breakout — in trends, trail the stop instead.
Combine the bands with a momentum oscillator such as the RSI to filter weak signals.
Frequently asked questions
What are the default Bollinger Band settings?
A 20-period simple moving average with upper and lower bands two standard deviations away.
Does touching the upper band mean sell?
No. In a strong uptrend price can "walk the band" for a long time. A touch is information about volatility, not a signal on its own.
What is a Bollinger Band squeeze?
A squeeze is when the bands contract to their narrowest width in months, showing unusually low volatility. It often comes before a large move, but it does not predict the direction.
What is Bollinger %B?
%B shows where price sits relative to the bands: 1 means at the upper band, 0 at the lower band, and 0.5 at the middle. Readings above 1 or below 0 mean price has closed outside the bands.
What timeframe works best for Bollinger Bands?
The default 20-period, 2-standard-deviation setting works on any timeframe. Range-reversion trades tend to work better on the 1-hour chart and above, where moves outside the bands are less often random noise.