Bollinger Bands, explained: settings, the squeeze, and how to read them

What are Bollinger Bands?

Bollinger Bands are a volatility indicator built by John Bollinger in the 1980s. They draw three lines on your chart: a middle band, which is a simple moving average of price, and an upper band and lower band placed a set number of standard deviations above and below it. Because standard deviation is a measure of how spread out recent prices have been, the bands automatically widen when the market gets volatile and squeeze together when it goes quiet.

That single property is what makes them useful. Most indicators tell you about direction. Bollinger Bands tell you about conditions — whether the market is currently expanding or contracting — and conditions decide which kind of trade even makes sense.

Bollinger Bands settings: what 20, 2 actually means

The default Bollinger Bands setting is 20, 2. The 20 is the lookback period for the middle moving average — roughly one month of daily candles. The 2 is how many standard deviations out the bands sit. Statistically, if prices were normally distributed, about 95% of them would fall inside two standard deviations, which is why price spends most of its time between the bands and only occasionally pokes outside.

Some traders shorten the period for intraday charts or widen the deviation for volatile instruments like Bank Nifty. There is no magic combination. Settings that look perfect on last year's chart are often just fitted to that data, and a setting is not a strategy — the rules around it are.

How to read the three bands

• Middle band (20 SMA): the reference for the medium-term trend. Price holding above it suggests buyers are in control; repeatedly failing at it suggests the opposite.
• Upper band: a statistically stretched level to the upside. Price reaching it means the move is strong relative to recent volatility, not that it must reverse.
• Lower band: the same on the downside.

The Bollinger Band squeeze

The squeeze is the setup Bollinger Bands are best known for. When the two bands contract to an unusually narrow width, it tells you volatility has dried up and the market has gone into a coil. Quiet periods do not last forever, so a squeeze is often followed by a sharp expansion in range.

The honest limitation: a squeeze tells you a big move may be coming, not which direction it will go. Plenty of squeezes break one way, trap everyone, and reverse. Traders who use squeezes generally wait for the breakout to actually happen and confirm it with something independent — volume, a trend filter, or a level from another method — rather than guessing direction in advance.

Walking the bands: why touching a band is not a sell signal

The single most common mistake with Bollinger Bands is treating a touch of the upper band as "overbought, so sell" and the lower band as "oversold, so buy". In a strong trend price can hug or ride the upper band for many candles in a row — a behaviour known as walking the bands. Anyone shorting each touch during that stretch is fighting the trend repeatedly.

A more sensible reading: band touches during a range often mark exhaustion; band touches during a trend often confirm strength. So the first question is not "has price touched a band?" but "is this market trending or ranging?" — and that requires a separate tool to answer.

%B and Bandwidth: the two derived readings

Two companion indicators come from the same maths and are worth knowing because they turn a visual into a number:

• %B tells you where price sits relative to the bands. A value of 1 means price is at the upper band, 0 means at the lower band, 0.5 means at the middle. It makes "how stretched is this?" measurable and comparable across instruments.
• Bandwidth measures the distance between the bands as a percentage of the middle band. It's how you identify a squeeze numerically instead of by eye — a bandwidth near multi-week lows is a compressed market.

Bollinger Bands in options trading

For option traders the volatility angle matters more than the price angle. Options are priced partly on expected volatility, so when you buy matters as much as what you buy. Buying options after a big expansion — when the bands are already wide and premiums are inflated — means paying up for movement that has already happened. Periods of contraction, when premiums are cheaper, are structurally a friendlier place to be a buyer, provided a directional signal actually arrives.

This is a way of thinking about context, not a rule that produces trades. Option pricing also depends on time to expiry, the implied volatility environment, and the strike you choose — Bollinger Bands say nothing about any of those.

What Bollinger Bands cannot do

They are calculated entirely from past prices, so they lag. They do not predict direction. They do not account for news, results, or policy events that can gap a market straight through both bands. And on very thin or erratic instruments, the standard deviation calculation itself becomes unstable.

Used honestly, Bollinger Bands are a volatility context tool: they help you decide whether the market is coiled or expanded, and therefore whether a breakout idea or a mean-reversion idea is even appropriate today. Everything else — entry, stop, position size, exit — still has to come from your own written rules.

Common questions