Two bands that widen when price runs wild,and tighten in when it turns mild.
A technical analysis indicator consisting of a moving average with a band above and below it, each set a number of standard deviations away, commonly two.
The bands widen when the market is volatile and narrow when it is quiet, and show whether a price is high or low relative to its own recent behaviour, not where it goes next.
In plain words
Bollinger Bands are three lines drawn on a price chart: a moving average in the middle, and a band above and below it set a number of standard deviations away, commonly two. Standard deviation measures how widely prices have been scattered around their average, so the bands widen when the market is volatile and narrow when it is quiet.
See it move
Moving between Upper band and Lower band
Why it matters
The bands put the current price in context: high or low relative to its own recent behaviour. Traders also watch the width of the bands, since a narrow band shows an unusually quiet market.
Worked example
An example only. The figures are round and invented for the arithmetic: they are not market prices.
With invented figures, the 20-period average is 1.1000 and the standard deviation is 0.0025.
- 1Upper band = 1.1000 + 2 × 0.0025 = 1.1050
- 2Lower band = 1.1000 − 2 × 0.0025 = 1.0950
- 3Width = 1.1050 − 1.0950 = 0.0100 = 100 pips
The bands sit 50 pips either side of the average and 100 pips apart.
A common mistake
A touch of the upper band is often read as a sign that the price must turn down. In a strong trend the price can run along a band for a long time, so a touch says only that the price is high relative to its recent average.
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Educational information, not investment advice or a recommendation to trade.