GlossaryBollinger Bands

Bollinger Bands

Bollinger Bands place two bands around a simple moving average. Their distance follows the standard deviation of the closing prices: in volatile phases the bands spread apart, in quiet ones they contract. This shows you whether a price has run far relative to its recent volatility.

Calculation

$C_t$ is the closing price, $n$ the Length, $k$ the number of Standard deviations. All values refer to the last $n$ candles including the current one.

Midline $\mathrm{MB}_t$ (dashed), a simple moving average: the average of these $n$ closing prices.

Standard deviation over the same window, divided by $n$ and not by $n-1$ :

\sigma_t = \sqrt{\frac{1}{n} \sum_{i=0}^{n-1} \left(C_{t-i} - \mathrm{MB}_t\right)^2}

Upper and lower band:

\mathrm{OB}_t = \mathrm{MB}_t + k\,\sigma_t, \qquad \mathrm{UB}_t = \mathrm{MB}_t - k\,\sigma_t

The area between the bands is lightly shaded. The distance between the bands is $2k\,\sigma_t$ , so it grows directly with volatility. The first value appears once $n$ candles are available.

How to read them

Squeeze: When the bands contract more tightly than they have in a long time, the market is unusually quiet. Such phases are often followed by a larger move. The bands do not reveal the direction.
Walking the band: In a strong trend, the price often runs along the upper or lower band for many candles. A touch is then not a reversal signal but a sign of strength.
Sideways market: Without a trend, the price often swings between the bands. A close outside followed by a close back inside the band then counts as a hint of a return to the midline.
Midline: It is an ordinary SMA of the set length. In orderly trends it often serves as the first support or resistance.

Tip Also add the Keltner Channel to the chart. When the Bollinger Bands lie completely inside the Keltner Channel, that is the well-known squeeze setup many breakout traders wait for.

Settings

Setting	Default	Effect
Length	20	Window $n$ for the midline and standard deviation (2–200).
Standard deviations	2	Factor $k$ for the distance between the bands (0.5–10, in steps of 0.5). Larger means further out and touched less often.

Limitations

Prices are not normally distributed. Closes outside the bands therefore happen more often than the rule of thumb “about 95% within two standard deviations” suggests.
Wicks are not included: a long wick can stick out far past a band without moving it.
The bands are symmetrical. A one-sided move widens both equally.