Bollinger Bands
Volatility envelope drawn 2 standard deviations above and below a 20-period SMA; bands widen in volatile markets and contract during consolidation.
Formula
Middle = SMA(20); Upper = SMA(20) + 2σ; Lower = SMA(20) − 2σ; where σ = std dev of close over 20 periods
Bollinger Bands consist of three lines: a 20-period middle band (SMA), an upper band (+2σ), and a lower band (−2σ). About 95 % of closes fall within the bands under normal conditions.
Key signals include the Bollinger Squeeze — extreme band contraction that often precedes a breakout — and walking the band, where price repeatedly tags the upper band during a strong trend. Touches of the lower band during a range are not automatic buy signals; always confirm with a momentum indicator.
Example
After three weeks of tight consolidation, the Bollinger Bandwidth drops to its lowest in a year (the "squeeze"). Price then breaks above the upper band on above-average volume, triggering a long entry. Traders target a move equal to the band width at the breakout point.
Related Terms
Average True Range (ATR)
Volatility measure averaging the greatest of: current high–low, current high–prior close, or current low–prior close over n periods (default 14).
IntermediateBollinger Bandwidth
Measures the percentage width of Bollinger Bands relative to the middle band; extreme lows signal a volatility squeeze preceding a large move.
IntermediateDonchian Channel
Breakout envelope plotting the highest high and lowest low over the past n periods (typically 20); the midline is their average.
IntermediateKeltner Channel
Volatility envelope using a 20-period EMA as midline and ATR multiples (typically 2×) as upper and lower bands.
IntermediatePivot Points
Price levels calculated from the prior period's high, low, and close that act as projected support (S1–S3) and resistance (R1–R3) for the next session.
BeginnerSimple Moving Average (SMA)
Arithmetic mean of the last n closing prices — the simplest smoothing tool and anchor for countless other indicators.
BeginnerStandard Deviation
Statistical measure of price dispersion around a mean; rising values indicate increasing volatility, falling values a tightening range.
Intermediate