Bollinger Bands are a technical indicator consisting of three lines that measure volatility. The middle line is a 20-period simple moving average (SMA) of price. The upper and lower bands are calculated by adding and subtracting two standard deviations from the middle line, respectively.
When price touches or crosses an outer band, it suggests potential overbought (upper band) or oversold (lower band) conditions. When the bands contract, volatility is low and a sharp price move may follow. When they expand, volatility is rising and the market is more active.
Traders commonly use two strategies with Bollinger Bands. The Bollinger Squeeze identifies periods of low volatility that often precede significant moves. The Bollinger Bounce trades reversals when price bounces off the outer bands.
Key limitations: Bollinger Bands show a volatility range but do not provide precise entry or exit signals. They can generate false signals in ranging (sideways) markets. Effectiveness depends on parameter choice—changing the period length or standard deviation multiplier affects how responsive the indicator is. Most traders combine Bollinger Bands with other technical indicators rather than using them alone.
