Bollinger Bands, developed by John Bollinger in the 1980s, are one of the most mathematically rigorous indicators in technical analysis. Unlike static support and resistance lines, Bollinger Bands adapt dynamically to market volatility: they expand when volatility is high and contract when volatility is low. By combining a moving average with standard deviation envelopes, the bands provide a self-adjusting framework that answers a critical question: is current price high or low relative to recent trading range?
Anatomy of Bollinger Bands
Bollinger Bands consist of three lines plotted directly on the price chart using the standard (20, 2) settings:
1. Middle Band = 20-period Simple Moving Average (SMA). 2. Upper Band = 20 SMA + (2 × 20-period Standard Deviation). 3. Lower Band = 20 SMA − (2 × 20-period Standard Deviation). Statistical Property: In a normal distribution, approximately 95% of all price data will fall between the upper and lower bands.
The Bollinger Squeeze
The Bollinger Squeeze is the single most important setup the indicator generates. Market volatility is cyclical: periods of high volatility are followed by periods of low volatility, which are inevitably followed by explosive expansions in volatility.
When the upper and lower bands contract toward each other until they are unusually close together, the market is in a squeeze. Price is consolidating and coiling energy. The squeeze does not tell you which direction price will break, but it guarantees that a major directional move is approaching.
Trading the Bands: Mean Reversion
In ranging or sideways markets, Bollinger Bands function as excellent dynamic support and resistance levels. When price reaches the upper band and prints a reversal candle, it has a high probability of reverting to the middle band (20 SMA) or the lower band. When price tests the lower band and rejects, traders look for long entries targeting the mean.
Riding the Bands: Strong Trends
In strong trending conditions, mean reversion fails completely. During a powerful bullish trend, price will "walk the upper band" - continuously hugging or piercing the upper boundary as the bands expand rapidly. In such conditions, touching the upper band is not a sell signal; it is confirmation of exceptional trend strength.