Bollinger Bands plot a moving average (typically the 20-day SMA) with an upper and lower band set two standard deviations away. Because the bands are based on standard deviation, they automatically widen when volatility rises and contract when it falls — making them a direct visual read on how much price is actually moving, not just where it is.
The formula
20-day SMA+2 × Standard Deviation
= Upper Band
Why it matters
- —A 'squeeze' — bands contracting to their narrowest in months — typically precedes a large directional move, though it doesn't predict which direction.
- —In a strong trend, price can 'walk' the upper or lower band for an extended stretch; that's a sign of strength, not an automatic reversal signal.
- —Most useful combined with a momentum reading like RSI: price touching a band while RSI is at an extreme is a stronger signal than either tool alone.
How to read it
| Bands narrow (squeeze) | Low volatility — often precedes a big move |
| Price walking the upper band | Strong uptrend, not automatically overbought |
| Price outside the band, then back inside | Potential mean-reversion signal |