Bollinger Bands
Technical IndicatorsA volatility indicator consisting of three lines: a middle simple moving average (typically 20-period) and upper and lower bands set at 2 standard deviations above and below it. The bands expand during high volatility and contract during low volatility.
What Are Bollinger Bands?
Developed by John Bollinger, this indicator wraps a price channel around a 20-period Simple Moving Average. The upper band sits 2 standard deviations above the SMA and the lower band sits 2 standard deviations below. Since standard deviation measures Volatility, the bands automatically widen when the market is volatile and narrow when it is calm. About 95% of price action falls within the bands under normal conditions.
Key Bollinger Band Signals
The "squeeze" is the most anticipated signal: when the bands contract to an unusually narrow width, it indicates low volatility, which typically precedes a significant breakout in either direction. Watch for the squeeze on EUR/USD or GBP/USD before major news events. Band walks occur during strong trends when price hugs the upper band (bullish) or lower band (bearish) for extended periods. Touching the outer band alone is not a buy or sell signal; it is context-dependent.
Bollinger Bands with Other Indicators
Combine Bollinger Bands with RSI (Relative Strength Index) for a powerful system: when price touches the lower band AND RSI is below 30, the oversold signal is stronger than either indicator alone. The bandwidth (upper band minus lower band divided by middle band) provides a numeric measure of the squeeze. Compare bandwidth to its own Moving Average to identify when a squeeze is historically tight and likely to produce a breakout.
Related Terms
Keltner Channel
A volatility-based envelope indicator that plots bands above and below an exponential moving average using the Average True Range. Unlike Bollinger Bands, which use standard deviation, Keltner Channels produce smoother bands that are less prone to sudden width changes.
Donchian Channel
A trend-following indicator that plots the highest high and lowest low over a set number of periods (default 20). Breakouts above the upper channel or below the lower channel signal potential new trends.
Volatility
The degree to which a currency pair's price fluctuates over a given period. High volatility means large price swings; low volatility means the price moves in a narrow range.
Average True Range
A volatility indicator that measures the average range of price bars over a specified period, accounting for gaps. ATR does not indicate direction but shows how much a pair typically moves, helping traders set appropriate stop-losses and position sizes.