Bollinger Bands
Bollinger Bands are a volatility indicator consisting of a simple moving average flanked by two bands plotted at a specified number of standard deviations above and below the average, designed to characterize the historical relationship between price and price variability.
Bollinger Bands were developed and trademarked by technical analyst John Bollinger in the early 1980s. The indicator consists of three lines plotted on a price chart: a middle band — typically a 20-period simple moving average of closing prices — and an upper and lower band each plotted at two standard deviations above and below the middle band, respectively. The standard deviation is calculated from the same 20-period data used for the moving average.
The defining characteristic of Bollinger Bands is that they expand and contract dynamically in response to changes in historical price volatility. During periods when a security's price has been historically volatile, the bands widen. During periods of historically subdued price action, the bands narrow. This makes Bollinger Bands a visual representation of the relationship between current price levels and the recent statistical distribution of prices.
Statistically, if prices were normally distributed, approximately 95 percent of closes would be expected to fall within two standard deviations of the mean — and therefore within the bands — simply by virtue of the mathematics of standard deviation. John Bollinger and many technical analysts have documented historical observations of 'band touches': instances where price reached the upper or lower band. Such touches do not, mathematically or empirically, imply a reversal; prices can 'walk the band,' meaning they can remain near the upper or lower band for extended periods during sustained trends.
A well-studied historical pattern with Bollinger Bands is the 'squeeze': a period during which the bands narrow significantly, historically associated in many markets with a subsequent period of elevated volatility. The squeeze is an observation about historical volatility cycles, not a forecast of the direction the subsequent price move will take.
Bollinger Bands are frequently used alongside other indicators such as RSI or MACD to attempt to provide additional context for analyzing historical price behavior. Like all technical indicators, they are mathematical summaries of past price data and carry no inherent predictive power regarding future prices.