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Good Trading Guide

Bollinger Bands Explained

Module 6B: Indicators · Lesson 4 of 10 · Back to course

Bollinger Bands are the three lines you’ve probably seen hugging price on someone’s screenshot – a middle line with an upper and lower band that widen and narrow as the market gets busier or quieter. They’re a volatility tool first and foremost. Most of the mistakes people make with them come from treating them as something else.

What it is

Bollinger Bands were developed by John Bollinger in the 1980s. They’re an overlay, drawn on top of the price chart, with three lines:

  • Middle band: a 20-period simple moving average (SMA) of closing prices.
  • Upper band: the middle band plus 2 standard deviations.
  • Lower band: the middle band minus 2 standard deviations.

The standard settings are 20 periods and 2 standard deviations. When the market is volatile, the bands widen. When it’s quiet, they contract.

How it’s calculated (in plain English)

  1. Middle band: add up the last 20 closes and divide by 20.
  2. Standard deviation: a statistical measure of how spread out those 20 closes are around their average. If closes are bunched tightly together, the standard deviation is small. If they’re spread out, it’s large. Your platform works it out for you.
  3. Upper band = middle band + (2 × standard deviation).
  4. Lower band = middle band − (2 × standard deviation).

You’ll often read that “about 95% of prices fall inside the bands”. That figure comes from a textbook bell-curve (normal distribution). Market prices don’t follow a neat bell curve – big moves happen more often than that model expects – so treat the bands as a rough guide to “normal range” rather than a statistical guarantee.

Two related readings some platforms offer:

  • Bandwidth: the distance between the upper and lower bands. Low bandwidth = quiet market.
  • %B: where price sits within the bands. 1 means at the upper band, 0 at the lower band, 0.5 at the middle.

How traders use it

1. Spotting quiet and busy conditions. When the bands narrow sharply, volatility has dropped. This is often called a squeeze. Quiet periods are often followed by busier ones, but the squeeze doesn’t tell you which direction the next move will be. Some breakout traders use a squeeze as context for setups like the London Breakout Strategy or the Opening Range Breakout.

2. Band walks in trends. In a strong uptrend, price can “walk” along the upper band for many candles, repeatedly touching or closing beyond it. Many traders read this as strength, not as a reason to sell.

3. Mean reversion in ranges. In a clearly sideways market, moves to the outer bands sometimes reverse back towards the middle band. This only works while the range holds – and you only know a range has held in hindsight. Pair it with clear levels, as in the Support and Resistance Bounce Strategy.

4. The middle band as a reference. In a trend, pullbacks to the 20 SMA are a common reference point, similar to the idea behind the Moving Average Pullback Strategy.

Common mistakes

  • “Price touched the upper band, so sell.” A touch is not a signal. In trends, price can ride the band for a long time.
  • Assuming a squeeze tells you direction. It tells you volatility is low, nothing more. Many squeezes break one way, then reverse.
  • Treating the 95% figure as fact. Markets have more extreme moves than a bell curve predicts.
  • Using Bollinger Bands and Keltner Channels and ATR as separate confirmations. All three measure volatility (see Lesson 6B.10).
  • Ignoring news. Bands widen quickly around big data releases. A move outside the bands at 1:30pm UK time on US jobs day says more about the news than about the indicator.

Example (illustrative numbers)

All figures are made up for teaching purposes. They aren’t real prices or a trade idea.

On a 1-hour FTSE 100 chart:

  • 20-period SMA (middle band) = 8,000
  • Standard deviation of the last 20 closes = 25 points
  • Upper band = 8,000 + (2 × 25) = 8,050
  • Lower band = 8,000 − (2 × 25) = 7,950
  • Bandwidth = 8,050 − 7,950 = 100 points

If price is at 8,040, %B = (8,040 − 7,950) ÷ 100 = 0.9 – near the top of the recent range.

Now suppose over the next morning the standard deviation drops to 10 points. The bands tighten to 7,980–8,020 – a bandwidth of 40 points. That’s a squeeze: the market has gone quiet. A trader’s plan might say “watch for a break of the overnight range after the squeeze” – but it would still need a defined entry, stop and position size, and an acceptance that the first break may fail.

The prop firm angle

Bollinger Bands can help with two challenge problems:

  • Recognising conditions. Very wide bands mean bigger swings – a reason to cut position size so a normal move doesn’t hit your daily loss limit. (ATR does this job more directly; see Lesson 6B.5.)
  • Avoiding counter-trend losing streaks. Repeatedly fading band touches in a trending market is a fast way into drawdown. If your plan includes mean-reversion trades, write down how you’ll decide the market is ranging, and test it on demo first.

Key takeaways

  • Bollinger Bands = 20-period SMA ± 2 standard deviations. They measure volatility.
  • Narrow bands (a squeeze) mean a quiet market; they don’t predict direction.
  • In trends, price can walk along a band. A touch isn’t a reversal signal.
  • The “95% inside the bands” idea comes from a bell-curve model that markets don’t follow closely.

Quick quiz

  1. What is the middle Bollinger Band by default? (A 20-period simple moving average.)
  2. If the middle band is 1.2600 and the standard deviation is 0.0020, where are the bands? (Upper 1.2640, lower 1.2560.)
  3. What does a Bollinger squeeze tell you? (Volatility is low – not which way price will break.)
  4. Why is “sell at the upper band” risky in a strong trend? (Price can walk along the upper band for many candles.)
  5. What does a %B of 0.5 mean? (Price is at the middle band.)

Key terms

Bollinger Bands · Standard deviation · Simple moving average (SMA) · Squeeze · Mean reversion · Volatility · Also see Trading jargon in plain English.

Try this

On a demo chart of GBP/USD (1-hour), add Bollinger Bands (20, 2). Find the three narrowest squeezes of the past month. For each, note which way price broke first, and whether it carried on or reversed within the next few candles. Then find one strong trend and count how many candles closed outside the upper or lower band. Write one sentence on what that tells you about “band touch” signals.

FAQ

What are the best Bollinger Band settings? 20 and 2 are the standard defaults and what most traders use. Changing them to fit the past is curve-fitting.

Do Bollinger Bands work in forex? They can be calculated on any market. How useful they are depends on how they’re used within a tested plan.

What’s the difference between Bollinger Bands and Keltner Channels? Bollinger Bands use standard deviation; Keltner Channels use ATR. See Lesson 6B.8.

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6B.5 ATR in depth →

Disclaimer: This page is general education, not financial or investment advice or a personal recommendation, and it doesn’t take your circumstances into account. Examples are hypothetical, for illustration only, and not an invitation to buy or sell. Learning a strategy doesn’t guarantee profits. Past performance is not a reliable guide to future results. Futures, spread bets and CFDs are complex and carry a high risk of losing money quickly because of leverage, and most retail traders lose money. With a real futures account, losses can exceed your deposit. Only trade with money you can afford to lose, and speak to an independent FCA-authorised adviser if you’re unsure. Read our full risk warning.