Bollinger Bands are a volatility indicator consisting of three lines: a simple moving average in the middle, with upper and lower bands at a specified number of standard deviations away. Created by John Bollinger, the bands expand during high volatility and contract during low volatility, helping traders identify potential overbought/oversold conditions and volatility breakouts.
- Middle band: 20-period SMA
- Upper/lower bands: 2 standard deviations from middle
- Bands expand with volatility, contract with low volatility
How Bollinger Bands Work
Bands adapt to volatility automatically:
Bollinger Band Calculation:
Middle Band = 20-period SMA
Upper Band = Middle Band + (2 × Standard Deviation)
Lower Band = Middle Band - (2 × Standard Deviation)
Example:
20 SMA = ₹100
Standard Deviation = ₹5
Upper Band = 100 + (2 × 5) = ₹110
Lower Band = 100 - (2 × 5) = ₹90
Price Range: ₹90 to ₹110 contains ~95% of price action
High Volatility: SD increases → bands widen
Low Volatility: SD decreases → bands narrow
Quick Reference: Bollinger Band Signals
| Signal | Condition | Meaning |
|---|---|---|
| Touch Upper Band | Price at upper band | Potentially overbought |
| Touch Lower Band | Price at lower band | Potentially oversold |
| Band Squeeze | Bands narrow | Low volatility, breakout coming |
| Band Expansion | Bands widen | High volatility, trend active |
| Walking the Band | Price rides band | Strong trend |
Example: Bollinger Squeeze Trade
Breakout After Squeeze:
| Day | Price | Band Width | Signal |
|---|---|---|---|
| 1-5 | ₹98-102 | Narrowing | Squeeze forming |
| 6-8 | ₹99-101 | Very tight | Squeeze mature |
| 9 | ₹105 | Expanding | Breakout UP! Buy |
| 10 | ₹110 | Wide | Trend continues |
| 15 | ₹125 | Very wide | Strong uptrend |
Trade: Buy on upside breakout from squeeze.
Bollinger Bands show volatility by placing bands 2 standard deviations above and below a 20-period moving average. Tight bands signal low volatility and potential breakouts. Wide bands show high volatility. Use bands for mean reversion or breakout trading.
Bollinger Band Strategies
Mean Reversion
Buy when price touches lower band, sell at middle or upper band. Works in ranging markets.
Squeeze Breakout
Wait for bands to contract tightly, then trade the breakout direction.
Walking the Bands
In strong trends, price “walks” along upper (uptrend) or lower (downtrend) band. Don’t fade this.
Double Bottom at Lower Band
Price touches lower band twice with RSI divergence—strong buy signal.
Bollinger Band Limitations
- Not predictive – Touching bands doesn’t guarantee reversal.
- Trends override – Price can walk bands for extended periods.
- Best in ranges – Mean reversion fails in trending markets.
- Lagging – Based on past volatility.
Common Mistakes
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Selling just because price hit upper band – In uptrends, price rides the upper band.
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Buying just because price hit lower band – In downtrends, price walks the lower band.
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Ignoring the squeeze – Squeezes are often the best Bollinger signals.
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Using alone – Combine with RSI, MACD, or price patterns.
How JournalPlus Tracks Bollinger Bands
JournalPlus logs band position (upper/lower/middle) at entry, helping you analyze whether band-based entries correlate with trade success.
