Technical Analysis

Bollinger Bands — Definition & Example

A volatility envelope around a moving average — bands widen during high volatility and contract during calm.

Bollinger Bands plot a 20-period SMA with bands at ±2 standard deviations. About 95% of price action stays within the bands; touches of the upper band suggest stretched upside, lower band stretched downside. A "Bollinger squeeze" — bands narrowing dramatically — often precedes large breakout moves. Used for mean-reversion entries and volatility forecasting.

Formula

Upper Band = SMA(20) + 2σ; Lower Band = SMA(20) − 2σ

Example

A stock trades inside its Bollinger Bands for two weeks, with bands gradually narrowing — the squeeze. On the next session, a large breakout candle pierces the upper band with high volume. The squeeze release often runs for several days.

Related

Moving AverageSMA (Simple Moving Average)ATR (Average True Range)Chasing Momentum

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