Bollinger Bands
Learn how to calculate and interpret Bollinger Bands with its formula, a worked example, industry context and common mistakes.
Plots a moving average with upper and lower bands based on price volatility.
Formula
Bollinger Bands = SMA 20 +/- (2 x 20-period Standard Deviation)
Worked exampleIf SMA 20 is 100 and the standard deviation is 4, the upper band is 108 and the lower band is 92.
Calculation steps
- Calculate the 20-period simple moving average.
- Calculate the standard deviation of the same 20 closes.
- Add and subtract two standard deviations from the average.
How to interpret it
Price near the upper band can show strength or extension; price near the lower band can show weakness or a potential rebound area.
Industry context
Volatility regimes differ by stock. A narrow-band squeeze can precede movement, but direction still needs confirmation.
Accounting and market variations
Definitions, reporting choices, periods, capital structures, and market conventions can change how this metric should be compared.
- Do not assume touching a band means reversal.
- Compare the signal with volume and trend.
- Watch for false breakouts after very narrow bands.