What are Bollinger Bands?

Bollinger Bands are a technical indicator that draws a band around price to show how volatile it has been. A middle line tracks the average price, and an upper and lower line sit a fixed statistical distance above and below it. John Bollinger developed the tool in the 1980s, and it is now built into nearly every charting platform, including those used for crypto.

What is Bollinger Bands in trading?

The indicator has three lines. The middle band is usually a 20-period simple moving average, the kind of line explained in the 200-week moving average guide. The upper band is that average plus two standard deviations of price over the same 20 periods. The lower band is the average minus two standard deviations.

Standard deviation measures how spread out prices have been. When a coin swings sharply, the number rises and the bands move apart. When trading is quiet, they draw closer together. On a daily chart the period is a day, and on an hourly chart it is an hour, so the same coin can show very different bands depending on the timeframe.

Bollinger calls 20 periods and two deviations starting points, not fixed rules. His published rules suggest raising the deviation to about 2.1 for a 50-period average and cutting it to about 1.9 for a 10-period one.

What are Bollinger Bands used for?

Traders use the bands to judge whether price is high or low compared with its recent range. A related reading called %b shows where price sits inside the bands, at 1 on the upper band and 0 on the lower.

Bollinger's own rules warn against reading too much into this. He writes that touching a band is a tag, not a signal. In a strong trend, price can walk along the upper or lower band for many periods. The ideas of overbought and oversold markets apply only loosely here.

What is Bollinger Bands width?

BandWidth measures how far apart the bands are. TradingView calculates it as the upper band minus the lower band, divided by the middle band, times 100. A low reading means the bands are tight.

A long stretch of low BandWidth is called a squeeze. It marks a quiet period, which traders watch because a new trend may start when volatility expands again. The squeeze does not say which way that move will go, and TradingView notes that breakouts can reverse straight away. What counts as narrow also differs between coins and timeframes.

What are the limits of Bollinger Bands?

The bands borrow statistics that assume prices are spread out in a normal bell curve, but returns are not. Bollinger says about 90% of prices fall inside default bands, not the 95% a bell curve would suggest, and studies cited by Wikipedia found similar figures. Research on trading rules built on the bands has produced mixed results. Like other indicators, they describe recent prices, and news can move a coin outside them at any time.