What is the Bollinger Bands Indicator?
Bollinger Bands is a volatility indicator that plots a moving average with an upper and lower band that expand and contract based on how widely price is swinging. It is drawn directly on the price chart as three lines: the middle band (the baseline average) and two outer bands that adapt to changing volatility. Traders read it to judge extension from the average, spot volatility contraction/expansion, and frame whether price is trading near the top or bottom of its recent range.
How is the Bollinger Bands Indicator Calculated?
Bollinger Bands uses a moving average for the center line and standard deviation to place the outer bands at a volatility-adjusted distance.
Middle Band = SMA(N) of price (typically close)
Upper Band = Middle Band + (K × SD(N))
Lower Band = Middle Band − (K × SD(N))
N is the lookback period (default 20), SD(N) is the standard deviation of price over N periods, and K is the deviation multiplier (default 2). Wider standard deviation makes the bands spread out; smaller standard deviation pulls them in.
How to Use the Bollinger Bands Indicator in Trading?
To use Bollinger Bands in trading, treat the outer bands as a live map of volatility and extension, then take signals from how price behaves at the bands and around the middle line.
Mean reversion in ranges: buy when price tags or pierces the lower band and then closes back inside, target the middle band; sell when price tags the upper band and then closes back inside, target the middle band.
Trend strength (“walking the band”): in an uptrend, repeated closes near the upper band show persistent buying pressure; in a downtrend, repeated closes near the lower band show persistent selling pressure.
Squeeze breakout: when the bands narrow tightly, wait for a strong close outside the upper band (long) or lower band (short), then require follow-through on the next candle to confirm expansion.
Stops and structure: for mean reversion, place the stop beyond the recent swing that formed at the band; for breakouts, place the stop back inside the squeeze range or beyond the breakout candle’s opposite side.