Bollinger Bands

Bollinger Bands are three lines plotted around a stock’s price: a middle band (a 20-period simple moving average) and an upper and lower band set two standard deviations above and below the middle. The bands widen when the stock gets more volatile and narrow when it gets quieter.

When the price touches or exceeds the upper band, the stock has moved unusually far above its recent average. When it touches the lower band, it has moved unusually far below. Statistically, about 95% of price action falls within the bands.

The width of the bands is informative on its own. When the bands squeeze together tightly, the stock has been quiet and a bigger move may be coming (though the bands do not predict the direction). When they widen sharply, a large move has just occurred.

The bands adapt to volatility automatically. A volatile stock has wide bands; a calm stock has narrow ones. This makes them more dynamic than fixed overbought/oversold levels.

The Bollinger Bounce assumes that price tends to return to the middle of the bands. Traders buy near the lower band and sell near the upper band, with the middle band as the target. This works in range-bound markets but fails badly during breakouts.

The Bollinger Squeeze looks for periods where the bands narrow significantly (indicating low volatility) and then waits for the price to break out in one direction. The idea is that calm periods are often followed by large moves, and the squeeze helps identify when one might be building.