What Are Bollinger Bands, Really?

Bollinger Bands are a price envelope built around a moving average, but with a twist: the upper and lower bands stretch or contract based on volatility. They’re not predictive—they’re reactive. That’s key.

• Middle band: 20-day simple moving average (SMA)
• Upper band: SMA + 2 standard deviations
• Lower band: SMA – 2 standard deviations

Volatility expands the bands. Consolidation squeezes them.

So why care? Because price tends to live inside the bands—about 95% of the time if we assume a normal distribution. When it steps out, that’s your heads-up something’s shifting.

The Squeeze: Your Volatility Radar

When the bands tighten, volatility is low. But markets don’t stay calm forever.

Why it matters: A squeeze often precedes a breakout. Could be up. Could be down. The move itself is the alpha—direction comes later with confirmation.

How to prep:

• Watch for band contraction
• Pair with volume indicators or momentum oscillators (RSI, MACD)
• Set alerts around the band edges

Don’t jump the gun. The first move can be fake. The second is usually real.

Reading the Bounce

Prices have a habit of ping-ponging between bands—especially in range-bound conditions. This makes Bollinger Bounces useful for mean reversion setups.

• Touch lower band + cross back over SMA → Upper band becomes a target
• Touch upper band + fail to break higher → Lower band is the downside magnet

These are not blind trade triggers. They’re context clues. Use them to structure your trade logic.

Trending? Use Bands Differently

In a strong trend, prices can hug a band like it owes them rent.

Uptrend:

• Price rides the upper band
• SMA tilts upward
• Ignore overbought signals—momentum overrides mean reversion

Downtrend:

• Price clings to the lower band
• SMA angles down
• Oversold is not your cue to buy—it’s your cue to wait

Watch volume and secondary indicators. The trend’s real until proven otherwise.

Spotting Reversals and Breakouts

Here’s what to look for when the bands stretch or break:

Band Behavior	What It Suggests	Possible Moves
Price closes outside upper band	Overbought or breakout	Confirm with volume; look to fade or ride
Price closes below lower band	Oversold or breakdown	Watch for volume spike; consider shorts
Bands widen sharply	Volatility spike	Trend may be starting—monitor direction
Bands narrow over time	Compression	Breakout setup—be patient, not early

Use candle structure, volume, and momentum for validation. Never trade off band signals alone.

Custom Settings: Tailor It To Your Trade

Default is 20-period SMA and 2 standard deviations. But you’re not stuck with it.

• Short-term (e.g., scalping): Try 10-period SMA with 1.5 std dev
• Long-term (e.g., swing trading): 50-period SMA with 2.5 std dev

Adjust based on your timeframe and asset’s personality. Some stocks move clean. Others are chaos incarnate. Use platforms with preset screeners like Deepvue’s swing trading screens to find setups that match your band strategy.

Know The Limitations

Let’s not pretend Bollinger Bands are a crystal ball. They’re just one lens.

Downsides:

• They lag—everything’s based on past prices
• False signals in volatile conditions are common
• Mean reversion doesn’t work in strong trends

Best practices:

• Always use with a confirming indicator (volume, RSI, MACD)
• Adjust for different markets or timeframes
• Don’t assume a touch means reversal—it might mean momentum

Bollinger Bands are great for context. They’re not great for decision-making in isolation.