Bollinger Bands

Bollinger Bands were developed by technical analyst John Bollinger in the 1980s and have since become one of the most widely used volatility indicators in financial markets, including cryptocurrency trading. The indicator consists of three lines plotted directly on the price chart: a middle band, an upper band, and a lower band. The middle band is a simple moving average — typically set to 20 periods — that represents the medium-term trend of the asset's price. The upper and lower bands are plotted at a distance of two standard deviations above and below the middle band. Because standard deviation measures how widely price has been dispersing from its average, the bands automatically widen when volatility increases and narrow when volatility decreases. This dynamic width is the defining feature of Bollinger Bands. During periods of high price volatility — common during major news events or market breakouts — the bands expand dramatically to accommodate the wider price swings. During quiet, consolidating periods — often called a Bollinger Squeeze — the bands contract tightly around price, signaling that a significant price move may be building. Traders use Bollinger Bands for several purposes. First, price consistently touching or breaking above the upper band signals elevated upward momentum, while touches of the lower band signal elevated downward momentum. Second, the squeeze — the bands reaching their tightest point — is one of the most powerful setup signals the indicator produces, as compression in volatility is frequently followed by a sharp expansion in one direction. Third, the middle band often acts as dynamic support or resistance during trends, similar to how a 20-period moving average functions. In crypto markets, Bollinger Bands are particularly valuable because of the asset class's inherently high volatility and frequent squeeze-and-expansion cycles. Signal Thresholds — Bollinger Bands Standard settings 20-period SMA ± 2 standard deviations. The 2σ bands theoretically contain ~95% of price action under normal distribution — in practice, crypto fat tails mean price frequently exceeds the bands. Upper band touch Price touching or closing above the upper band: elevated in the range. When combined with RSI above 70, signals overbought conditions. In strong uptrends, price can "walk the band" — touching the upper band repeatedly is a continuation signal, not a reversal. Lower band touch Price touching the lower band: near the lower statistical extreme. With RSI below 30, indicates oversold conditions. As with the upper band, price can walk the lower band during sustained downtrends. Bollinger Band Width (squeeze) Band width below 1% of price: Bollinger Squeeze — volatility is historically compressed, and a significant directional move is typically imminent. Band width above 5–7% of price: volatility is elevated; trending conditions. Squeeze resolution direction often determines the next major move. %B indicator %B above 1.0: price is above the upper band. %B below 0: price is below the lower band. %B at 0.5: price is at the 20-period SMA. %B above 0.8 with rising %B = strong upside momentum. Mean reversion vs. breakout Trading range markets: fade upper/lower band touches. Trending markets: a close above the upper band on volume can signal a breakout, not a reversal. Context (ADX reading) determines which framework applies.