Bollinger Bands Explained: Trading Volatility

Bollinger Bands are a volatility indicator made up of three lines: a middle moving average, and an upper and lower band plotted a set distance away, based on how much the price is currently fluctuating.

How the bands are built

The middle band is typically a 20-period SMA. The upper and lower bands sit two standard deviations above and below it. Because standard deviation measures how spread out price movements are, the bands automatically widen when volatility increases and narrow when it decreases.

Reading band width

A “squeeze,” where the bands narrow tightly together, indicates unusually low volatility — often seen before a significant price move, though it doesn’t say which direction. Wide bands indicate high volatility and often follow a strong directional move.

Price touching the bands

Price touching or briefly moving outside the upper band doesn’t automatically mean “overbought,” and touching the lower band doesn’t automatically mean “oversold” — in a strong trend, price can ride along a band for an extended period.

Combining with other tools

Because Bollinger Bands describe volatility rather than direction, many traders combine them with a momentum indicator like RSI or MACD to get a fuller picture of both how much and which way the price is likely to move.

Key takeaway

Bollinger Bands are primarily a volatility measure, not a direct buy/sell signal — the width of the bands tells you about market conditions, which then informs how you interpret other signals.