Bollinger Bands explained: volatility, squeezes and band touches
Bollinger Bands are a volatility gauge drawn on a price chart, not a support and resistance line. Learn how they are built and what a touch really tells you.
Key takeaways
- The bands sit two standard deviations above and below a 20-day average.
- Calm markets give narrow bands; wild markets give wide bands.
- A touch of the lower band means price is stretched against its own recent range, not that it is cheap.
- A band rule needs a second condition, such as the longer trend, and must be tested.
How the bands are built
Start with a 20-day moving average of the closing price. That is the middle line. Then measure how much price has been swinging around that average recently, which is its standard deviation, and draw one band that distance above and one below. The common setting is two standard deviations.
Calm and wild markets
When the stock has been calm, the bands sit close together. When it has been wild, they spread apart. So the width of the bands is a picture of recent volatility.
The squeeze
A stretch of very narrow bands is called a squeeze. It often comes before a bigger move, but the bands do not say which way the move will go.
What a band touch means
When price touches or closes below the lower band, it is stretched unusually far below its own recent average. The mean-reversion idea is that such stretches often snap back toward the middle. The band does not say the stock is cheap, and a stock in a strong downtrend can walk along its lower band for weeks.
How strategies use the bands
SmartPaperDesk includes three rules built on the lower band. Bollinger Lower Band Touch buys when the close falls below the lower band. Bollinger Band Mean Reversion buys the same dip and exits once price recovers to the middle band. Bollinger Bounce In Uptrend takes the dip only while price is above its 200-day average, which filters out many falling stocks. Open any card to read the exact rule.
Test a band rule on paper
Write the rule down, test it on historical daily data with estimated charges and a stop, and compare the number of trades and the worst dip, not only the final number. You can do this on the free plan with no real money.
Questions people ask
Are Bollinger Bands support and resistance lines?
No. They measure how stretched price is against its own recent range. Price can move outside them and stay there.
What are the standard Bollinger Band settings?
A 20-period average with bands two standard deviations away. Other settings exist, but they change how often price touches the bands.
Test a Bollinger rule on the free plan
Keep reading
SmartPaperDesk is an educational paper-trading tool. Examples use a made-up Stock A.
For educational purposes only. This is not investment advice. Past performance does not guarantee future results.