Bollinger Bands

Stock trading dictionary: meaning, example and how traders use it.

Last updated: October 17, 2026

Definition: Bollinger Bands are a technical indicator consisting of a moving average with an upper and a lower band set a number of standard deviations away. The bands widen when volatility rises and narrow when it falls.

How Bollinger Bands work

Developed by John Bollinger in the 1980s, the indicator wraps price in an envelope that adapts to volatility. Because standard deviation grows when prices swing widely, the bands expand during turbulent periods and contract during quiet ones. Roughly speaking, most closing prices fall within the bands, so moves outside them are relatively unusual.

Bollinger Bands formula

  • Middle band: a 20-period simple moving average (SMA) of closing prices.
  • Upper band: middle band + (2 x 20-period standard deviation).
  • Lower band: middle band - (2 x 20-period standard deviation).

These are the default settings; traders sometimes adjust the period or the multiplier for different timeframes. Two related readings are %b, which shows where price sits relative to the bands, and bandwidth, which measures how far apart they are.

Example: calculating and reading the bands

Suppose a hypothetical stock's 20-day average close is $100 and the standard deviation of those closes is $2.50. The upper band is $100 + $5 = $105 and the lower band is $100 - $5 = $95.

If the stock closes at $105.80, it is above the upper band. That alone is not a sell signal; in a strong trend, price can ride the upper band for weeks. If, after a long quiet stretch, the bands had narrowed to $98 and $102 and the stock then closed at $103 on strong volume, many traders would treat it as a squeeze breakout.

How traders use Bollinger Bands

  • The squeeze: unusually narrow bands indicate low volatility, which often precedes a sharp move. The direction is not implied by the squeeze itself.
  • Mean reversion: in range-bound markets, touches of the upper or lower band may mark areas where price tends to turn back toward the middle, similar to resistance and support.
  • Trend riding: in strong uptrends, closes repeatedly near the upper band and pullbacks that hold the middle band suggest the trend is healthy.
  • Divergence: a new price high that registers a lower %b reading than the prior high may warn of fading momentum and a possible reversal.

Most charting software lets you overlay the bands on a price chart.

Limitations

Bollinger Bands describe volatility relative to recent history; they do not predict direction. Band touches can be strong signals in a range and poor ones in a trend, so context matters. John Bollinger himself recommends combining them with other, non-correlated tools, such as volume indicators or relative strength measures, rather than using them alone.

Frequently asked questions

What do Bollinger Bands tell you?

They show how far price has moved relative to its recent average and volatility. Narrow bands indicate low volatility, wide bands indicate high volatility, and price near a band shows it is stretched relative to recent norms.

Is touching the upper Bollinger Band a sell signal?

Not on its own. In ranges it can mark a potential turning point, but in strong uptrends price often stays near the upper band for extended periods.

What is a Bollinger Band squeeze?

A squeeze is when the bands narrow significantly because volatility has dropped. Traders watch for a breakout from the squeeze, which can lead to a large move in either direction.

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For information only, not investment advice. See the disclaimer.