Bollinger Bands are a volatility-based indicator that adapt to changing market conditions.
Rather than predicting direction, they help answer a different question:
Is price behaving normally, or is it stretched relative to recent volatility?
What Bollinger Bands represent
Bollinger Bands consist of three lines:
- Middle band
A moving average (typically a 20-period SMA) - Upper band
Middle band + a multiple of standard deviation - Lower band
Middle band − a multiple of standard deviation
Together, they form a dynamic price envelope that expands and contracts with volatility.
Volatility, not overbought or oversold
Bollinger Bands are often misunderstood as overbought/oversold indicators.
In reality, they reflect:
- how volatile the market is
- how far price has moved relative to recent dispersion
Price touching or exceeding a band does not imply reversal.
It implies volatility expansion.
Band expansion and contraction
Band expansion
When bands widen:
- volatility is increasing
- price movement is accelerating
- markets are transitioning into active phases
Expansion often follows periods of compression.
Band contraction (the “squeeze”)
When bands narrow:
- volatility is compressed
- price movement is subdued
- markets are coiling
Squeezes often precede large directional moves, but not their direction.
Price behavior within the bands
Price tends to:
