Bollinger Bands explained

Volatility

What Bollinger Bands measures

Bollinger Bands consist of a middle band (20-period SMA) with upper and lower bands plotted 2 standard deviations above and below. The bands dynamically widen during high volatility and narrow during low volatility. They provide relative high/low levels based on recent volatility, not absolute fixed levels.

How Bollinger Bands readings are interpreted

Price touching the upper band means it's at a statistically high level relative to recent history — not automatically a sell, but worth attention. Price touching the lower band is statistically low. The 'Bollinger Squeeze' (narrow bands) signals low volatility and a potential breakout. 'Band walks' (price riding along one band) indicate strong trends.

Conventional Bollinger Bands levels

Price at upper band: high relative to recent range — potential reversal or strong trend
Price at lower band: low relative to recent range — potential bounce or continuation
Band Squeeze (width near 6-month low): breakout imminent — watch direction carefully
Price closes outside bands: rare event, often mean-reverts next 1-3 bars
Middle band (20 SMA): key support/resistance and trend direction indicator

Where Bollinger Bands works, and where it does not

Works in all market conditions but interpreted differently. In ranges: upper/lower bands are effective reversal zones. In trends, price 'walks the band', and band touches are not conventionally read as reversals. The squeeze pattern works in all regimes as a breakout predictor.

Indicators commonly read alongside Bollinger Bands

RSI: Price at lower BB + RSI < 30 = very strong oversold setup
Volume: Band squeeze + volume breakout = confirmed move direction
Stochastic: BB lower touch + Stochastic oversold = bounce setup

Known limitations of Bollinger Bands

BB alone can't distinguish between reversal and continuation at the bands
The default 2-standard-deviation setting means price is at the band ~5% of the time — adjust to 1.5 for more touches
During earnings or macro events, bands expand rapidly making them temporarily useless

Bollinger Bands in practice

In mean-reversion approaches, a lower-band touch with RSI below 35 is read as stretched, with the middle band as the reference target
In breakout approaches, the squeeze — the narrowest bands in weeks — is watched, and the direction of the break taken as the signal
The 20 SMA middle band is commonly used as a trailing reference level within trends
Across timeframes, a weekly lower-band touch during a daily uptrend is regarded as a notable confluence

Other volatility indicators

Bollinger Band Width
Normalized ATR
Keltner Channel
Donchian Channel

Testing ideas built on Bollinger Bands

A reading of Bollinger Bands can be written as an exact rule and checked against historical data — as a full strategy with entries, exits and costs, or as a single condition and what followed it:

How to backtest a trading strategy without code
Event analysis: what follows a market event

Plot it yourself. Add this indicator to a chart, change every parameter and watch the line move, then backtest how the rule would have behaved on historical data — free on the S&P 500 ETF, no card.

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This is reference material, not advice. It describes what each indicator measures and how its readings are conventionally interpreted. Nothing here is a recommendation to buy or sell anything, and no indicator predicts future prices. GU Analyser is an analytical tool — no money is ever traded here.