Bollinger Bands plot a moving average with two bands set a number of standard deviations above and below it. The default is a 20-period average with bands at two standard deviations. Because standard deviation is a measure of volatility, the bands widen when the market is volatile and pinch together when it is quiet.
What it measures
The width of the bands is the real signal. A squeeze - bands contracting to a narrow neck - shows volatility has collapsed and often precedes a sharp expansion, though it does not tell you which way. The middle line, the 20-period average, acts as dynamic support and resistance and as a bias filter: price above it leans bullish, below it bearish.
How to read it
Where traders get it wrong
The trap is treating a touch of the upper band as an automatic sell and the lower band as a buy. In a strong trend, price rides the outer band for a long time - fading it means fighting the trend and losing. The bands mark the edge of a pair's recent range, not a hard ceiling. Use band touches for mean reversion only in a confirmed range, and use the squeeze as a volatility heads-up, not a direction call.
An indicator confirms, it does not command. The signal is a reason to look, not an order to trade. Combine it with levels and the trend, and size every trade with the position size calculator so a false signal costs a small, fixed amount.
Test it before you trust it
Every indicator lags, because it is built from prices that have already printed. Add it to the chart in the simulator, trade the same setup with and without it across a large sample, and keep it only if it genuinely raises your expectancy - not because the signal looks convincing in hindsight.
Bollinger Bands FAQ
What do Bollinger Bands tell you?
Bollinger Bands show volatility around a moving average. The bands are set a number of standard deviations from a 20-period average, so they widen when the market is volatile and narrow when it is calm. They help you gauge whether price is stretched relative to recent volatility and whether a period of quiet is likely to end in a breakout.
What is a Bollinger Band squeeze?
A squeeze is when the bands contract into a narrow neck, showing volatility has dropped sharply. Because volatility tends to cycle, a squeeze often precedes a strong move - but it does not indicate direction. Traders watch a squeeze for an impending breakout and then take the break itself as the directional signal.
Should you buy when price hits the lower Bollinger Band?
Not automatically. In a range, a touch of the lower band can be a mean-reversion buy, but in a downtrend price can walk down the lower band for a long time while every dip-buy loses. A band touch marks the edge of recent range, not a guaranteed reversal - confirm with the trend and a level first.