The width is the indicator.
- ±2 standard deviations around a 20-day average
- Touching a band is information, not a signal
- Prices are not normally distributed — the maths under it leaks
What this is about
Bollinger Bands draw a channel around the price that widens when the share is moving a lot and narrows when it is quiet. They are the only indicator in this chapter that measures volatility rather than direction or momentum — which makes them the most useful one to have alongside the others, and the one most often read backwards.
How they are built
Three lines:
- Middle band — a moving average, conventionally 20 periods.
- Upper band — the middle band plus 2 standard deviations of price over the same window.
- Lower band — the middle band minus 2 standard deviations.
Standard deviation measures how spread out recent prices have been. So:
Wide bands = the share has been moving a lot recently. Narrow bands = it has been quiet recently.
The width is the indicator. The lines are just how it is drawn.
The misreading to remove first
Because 2 standard deviations covers about 95% of observations in a normal distribution, people conclude that price touching the upper band is a rare event meaning "too high".
Two things are wrong with that.
The bands are recalculated from the same recent prices. They are not a fixed boundary the price is testing — they move with it. A share rising steadily drags its own upper band up alongside it, and can "touch the upper band" day after day without anything unusual occurring.
Share prices are not normally distributed. Returns have fatter tails than the normal distribution assumes: extreme moves happen considerably more often than the 95% figure implies. The statistical reassurance in "2 standard deviations" is weaker than it sounds, and it is weakest exactly when it matters — during a crash.
So: touching a band is not a signal. In a trend it is what a trend looks like.
What they are genuinely good for
Seeing the volatility regime. One glance answers "is this thing calm or wild at the moment", which is a real and useful question — and it feeds directly into Stop loss and Position sizing. A share whose bands are wide needs a wider stop and therefore a smaller position. That is the single most practical use of this indicator and it has nothing to do with predicting direction.
The squeeze. When bands narrow sharply, recent movement has been unusually small. Extended quiet periods do tend to be followed by larger moves — volatility clusters, which is one of the better-documented properties of financial markets.
But note precisely what that gives you: timing, not direction. A squeeze says something is coming, not which way. Strategies that guess the direction of a breakout are guessing, and false breakouts out of squeezes are common enough to have their own name.
Context for other indicators. RSI at 75 with narrow bands and RSI at 75 with very wide bands are different situations. The second is a share that is moving violently anyway.
What this does not tell you
It does not tell you the price is too high or too low. The bands are made of the price. They cannot judge it.
It does not tell you a touch will reverse. The classic error. In a strong trend, price walks along the upper band for weeks — the same failure mode as selling every RSI reading above 70, and for the same reason.
It does not tell you which way a squeeze resolves. Only that quiet periods tend to end.
It does not mean 95% of prices will stay inside. That figure assumes a normal distribution that share prices do not follow, particularly in the tails that matter.
It is not independent of the moving average. The middle band is a moving average — the same one from lesson 2, with the same lag.
Where to see this in the app
Chart → Bollinger draws all three lines over the price.
The exercise worth doing once: turn the bands on and scroll back through a quiet stretch into a volatile one. Watch the channel breathe. That picture is the whole indicator, and it makes the width-not-the-touch point permanent.
Chart → the 20-day moving average, switched on alongside, shows that the middle band is exactly that average — useful for seeing that this indicator is not independent of the last two.
Portfolio and Alerts. The practical workflow is: check whether the bands are wide or narrow before choosing how far away to put a stop or an alert. Wide bands mean ordinary movement will reach a nearby level, and a stop set without looking will be hit by nothing more than a normal week.