Bollinger Bands Explained

Bollinger Bands consist of three lines: a middle band (typically a 20-period simple moving average) and an upper and lower band, each plotted a set number of standard deviations away from that middle line. Because standard deviation measures how spread out price has been recently, the bands automatically widen when the market gets more volatile and narrow when it calms down -- the indicator adapts to conditions rather than staying fixed.

One common use is spotting when price is stretched: price touching or pushing outside the upper band suggests it's relatively high compared to its recent range, while touching or pushing outside the lower band suggests it's relatively low. This isn't an automatic "sell the top, buy the bottom" signal on its own -- in a strong trend, price can ride along a band for an extended period -- but it's useful context for how extended a move already is.

A second common use is the "squeeze": when the bands narrow tightly together, it signals unusually low volatility, which often precedes a sharp breakout in either direction once volatility returns. Traders watch for a squeeze as a heads-up that a bigger move may be building, without knowing in advance which direction it will break.

Bollinger Bands work best combined with other tools -- price action, support and resistance, or momentum indicators like RSI or MACD -- to judge not just how stretched a move is, but whether it's likely to continue or reverse.