Bollinger Bands
A volatility envelope around a moving average: the bands widen when the market gets busy and tighten when it calms down.
Bollinger Bands were created in the early 1980s by John Bollinger, an American financial analyst. Their founding intuition: a price channel should not be static but should adapt to current volatility. The bands therefore frame price at a distance that expands in turbulent markets and contracts in quiet ones.
They serve simultaneously as a volatility gauge, a relative-value reference for price, and a detector of compressions that precede big moves : the famous "squeeze".
How it's calculated
The indicator plots three lines, computed by default in Screener.Trading over 20 periods with 2 standard deviations : John Bollinger's original settings:
- The middle band: a 20-candle simple moving average.
- The upper band: the middle band plus 2 times the standard deviation of closes over the same period.
- The lower band: the middle band minus 2 times that same standard deviation.
Standard deviation measures how dispersed prices are around their mean: the more scattered recent closes are, the wider the bands. Statistically, a large majority of closes fall inside the bands : which is what makes band breaches noteworthy.
How to read it
- Squeeze: sharply tightening bands signal compressed volatility : a directional move often follows, though the bands do not indicate its direction.
- Mean reversion: in a range, price hugging the upper band is relatively expensive, price at the lower band relatively cheap; price tends to revert toward the middle band.
- Walking the band: in a strong trend, price can "walk" along one band for weeks : touching the band is then not a reversal signal.
- Close outside the bands: rare and significant, it marks a statistically extreme move, to be interpreted according to the trend context.
The main limitation: the bands describe volatility, not direction. The same signal (price at the lower band) can be a buying opportunity in a range and a trap in a downtrend. John Bollinger himself recommends combining them with non-correlated indicators.
In the screener
All three bands (upper, middle, lower) are individually accessible in Screener.Trading rules. Concrete examples: "close below the lower band on D1" to list bearish extremes; "close above the upper band on H4" to detect powerful breakouts; "close above the middle band on D1" as a bullish bias filter.
With multiple timeframes, you can for instance look for a short-term extreme within a supportive context: H1 close below the H1 lower band, but daily close above the 200 SMA. Paired with an oversold RSI, the bands make for particularly readable mean-reversion screeners.
Touching a band is not a signal in itself: in a strong trend, price rides the band without reversing. Always check the trend context before interpreting a band touch.
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- GlossaryBollinger upper bandThe upper Bollinger Band sits two standard deviations above the 20-period simple moving average and marks the upper volatility zone of price.
- GlossaryBollinger lower bandThe lower Bollinger Band sits two standard deviations below the 20-period simple moving average and marks the lower volatility zone of price.
- GlossaryTimeframeA timeframe is the duration each candle on a chart represents (from one minute to several months) and sets the horizon of the analysis.
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