📊 TECHNICAL
Bollinger Bands
Three bands (upper, middle, lower) plotted at standard deviation levels above and below a moving average. Measures volatility and identifies breakout and mean-reversion setups.
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Live Demo — Bollinger Bands applied to NIFTY 50 (illustrative)
PriceSMA(20)Upper/Lower Bands (±2σ)
What are Bollinger Bands?
Bollinger Bands were developed by John Bollinger in the 1980s. They consist of three lines plotted on price — a middle band (SMA) and an upper/lower band at a set number of standard deviations away. The bands expand during high volatility and contract during low volatility.
Components
- Middle Band (MB): 20-period Simple Moving Average
- Upper Band (UB): MB + (K × Standard Deviation)
- Lower Band (LB): MB – (K × Standard Deviation)
- %B: Position of price relative to the bands (0 = lower band, 1 = upper band)
- Bandwidth: (UB – LB) / MB — measures volatility
Formula
MB = SMA(Close, 20)
σ = Standard Deviation(Close, 20)
UB = MB + (2 × σ)
LB = MB – (2 × σ)Parameters
| Parameter | Default | Description |
|---|---|---|
| Length | 20 | SMA period for middle band |
| Multiplier | 2.0 | Standard deviations for band width |
| Source | Close | Price input |
Signal Interpretation
- Price touches upper band → Overbought in a ranging market; potential mean reversion
- Price touches lower band → Oversold in a ranging market; potential bounce
- Band squeeze (low bandwidth) → Volatility compression — big breakout imminent
- Band expansion → Strong directional move; trend in play
- W-bottom → Two lows, second one above the lower band = bullish reversal
- M-top → Two highs, second one below the upper band = bearish reversal
The Squeeze
The Bollinger Band Squeeze is one of the most powerful setups in trading. When bands narrow to their tightest point in months, it signals that a major directional move is coming. The direction of the breakout determines the trade.
Trading Strategies
- Mean reversion: Buy lower band touch, sell middle band; sell upper band touch, buy middle band. Works in ranging markets.
- Breakout riding: After a squeeze, trade the breakout direction with price closing outside the band.
- Keltner Channel confirmation: Combine with Keltner Channels — when BB is inside KC, the squeeze is confirmed.
Tips & Best Practices
- Bollinger Bands are relative — they adapt to recent volatility. A touch of the upper band in a bull market is NOT automatically bearish.
- Use %B below 0 or above 1 (outside the bands) as extreme readings.
- Bandwidth is the best measure of squeeze — track its historical minimum.