Volatility envelope

BBBollinger Bands

Bollinger Bands plot a middle 20-period moving average with two outer bands set at standard deviations above and below. The bands expand during high volatility and contract during low — a powerful gauge of regime shifts.

20 candles, 2 std dev

Default period

Adapts to volatility

Range

Touch upper / touch lower

Signal levels

Mean reversion + volatility regime

Best use

What is BB?

Bollinger Bands were developed by John Bollinger in the 1980s. The indicator plots three lines: a middle 20-period simple moving average, an upper band at +2 standard deviations, and a lower band at -2 standard deviations.

Because the bands are derived from standard deviation, they automatically adapt to volatility. In a low-volatility consolidation, the bands compress tight. When volatility expands, the bands flare out. This contraction-expansion cycle is one of the most useful visual cues for detecting volatility regime shifts.

Category: Volatility envelope
Default settings: 20 candles, 2 std dev
Signal range: Adapts to volatility
Introduced by: John Bollinger, 1980s

How BB works

Three components:

Middle band = 20-period simple moving average (SMA) Upper band = Middle band + (2 * 20-period standard deviation) Lower band = Middle band - (2 * 20-period standard deviation)

Statistically, with normally-distributed price changes, roughly 95% of bars should close inside the bands. A close outside is an outlier event. The 'squeeze' — when bands compress to their tightest reading in 6 months — almost always precedes a directional expansion, though the direction itself is not predicted by the squeeze.

How to use BB

Three practical applications, ranked by frequency.

1. Squeeze breakouts: When bandwidth (upper minus lower, normalized) hits a 6-month low, the next directional move is usually large. The squeeze does not predict direction — wait for the break of the consolidation high or low to enter.

2. Mean reversion in ranges: In a confirmed range (no trend), buy touches of the lower band and sell touches of the upper band, with the middle band as the take-profit target. This fails in trends; never use it without confirming the regime first.

3. Riding the bands in trends: In strong trends, price 'walks the upper band' (uptrend) or lower band (downtrend) for extended runs. Buying upper-band touches in a confirmed uptrend is a momentum strategy, not a mean-reversion failure.

The same indicator reading means opposite things in trends versus ranges. Always classify the regime first.

Want more practical context? Look up unfamiliar terms in the forex glossary, or see how indicators stack on real charts in the trading blog.

BB FAQ

What are the standard Bollinger Bands settings?

20-period SMA with 2 standard deviations for both upper and lower bands. These have been the published default since John Bollinger introduced the indicator in the 1980s and remain the most widely-used settings.

What is a Bollinger Band squeeze?

A squeeze happens when the bands compress to their tightest reading over a lookback (typically 6 months). It signals an unusually low-volatility regime. Squeezes almost always precede a directional breakout but do not predict the direction — wait for confirmation.

Should I trade touches of the upper and lower bands?

Only in confirmed ranges. In trends, price routinely "walks" along the upper band (uptrend) or lower band (downtrend) for extended periods. Buying touches of the lower band in a downtrend is one of the most reliable ways to lose money systematically.

How do Bollinger Bands differ from Keltner Channels?

Both are volatility envelopes. Bollinger Bands use standard deviation, which is sensitive to outliers. Keltner Channels use ATR (Average True Range), which is more stable. Bollinger Bands react faster to volatility spikes; Keltner Channels are smoother and more useful as a trend filter.

Can Bollinger Bands work on any timeframe?

Yes. The math works identically on 1-minute, 4-hour, and weekly charts. Practical reliability is better on 4H and Daily; lower timeframes produce more squeeze-and-fakeout setups. Always match Bollinger signals to your overall strategy timeframe.

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