Bollinger Bands
Volatility envelope drawn 2 standard deviations above and below a 20-period SMA; bands widen in volatile markets and contract during consolidation.
Middle = SMA(20); Upper = SMA(20) + 2σ; Lower = SMA(20) − 2σ; where σ = std dev of close over 20 periods
Bollinger Bands consist of three lines: a 20-period middle band (SMA), an upper band (+2σ), and a lower band (−2σ). About 95 % of closes fall within the bands under normal conditions.
Key signals include the Bollinger Squeeze — extreme band contraction that often precedes a breakout — and walking the band, where price repeatedly tags the upper band during a strong trend. Touches of the lower band during a range are not automatic buy signals; always confirm with a momentum indicator.
On the desk
After three weeks of tight consolidation, the Bollinger Bandwidth drops to its lowest in a year (the "squeeze"). Price then breaks above the upper band on above-average volume, triggering a long entry. Traders target a move equal to the band width at the breakout point.