Bollinger bands
Family VI · Charts & indicators
Not to be confused with price channel, moving average, atr indicator.
Bollinger Bands are a chart overlay consisting of a central moving average and two outer bands placed a specified number of standard deviations above and below it. The distance between the bands is not fixed; it expands and contracts with the standard deviation of the price series over the chosen lookback. Because the calculation is based on standard deviation, the bands are a visual representation of recent price dispersion rather than a fixed support or resistance level.
Construction
The standard construction uses three lines:
- Middle band — a simple moving average of the closing price over n periods.
- Upper band — the middle band plus k times the standard deviation of those same closing prices.
- Lower band — the middle band minus k times the standard deviation.
The original formulation uses a 20-period moving average and k = 2, but both parameters are adjustable and different settings are common. The bands are usually drawn on the same price scale as the instrument, so they move with the market rather than staying at fixed values.
Worked example
Assume a 5-period simple moving average and k = 2 for illustration. The closing prices over the last five periods are 10, 12, 11, 13, 14.
The lower band is the key output here: it shows the level two standard deviations below the moving average. If the next close were 8, it would fall below the lower band, indicating that recent price dispersion has been unusually large relative to the lookback window.
Interpretation and limits
Bollinger Bands are descriptive, not predictive. A close outside the bands does not automatically signal a reversal or a continuation; it simply means the move is large relative to the recent standard deviation. Narrow bands indicate low volatility, which can precede a volatility expansion, but the direction of that expansion is not specified by the indicator. The bands do not generate buy or sell signals on their own and are often combined with other tools such as volume or momentum studies. Settings and visual defaults vary by charting platform, so the same instrument can display different bands on different software.
Often confused with
- price channel
- A price channel is a technical analysis pattern formed by drawing two parallel trendlines around a security's price series, one connecting swing highs and the other connecting swing lows, to define a corridor within which price tends to fluctuate.
- moving average
- A moving average is a continuously recalculated line that plots the arithmetic mean of a price series over a fixed number of the most recent periods, dropping the oldest value as each new one is added.
- atr indicator
- The ATR indicator is a technical analysis tool that measures market volatility by calculating the average of true range values over a specified number of periods, typically 14.
See also
- forex technical analysis indicators
- price action
- fundamental analysis
- support and resistance
- technical analysis
- fibonacci