Bollinger Bands

Bollinger Bands are a volatility indicator created by John Bollinger in the 1980s, consisting of three lines plotted relative to a security's price. They dynamically adapt to market conditions, expanding during high volatility and contracting during low volatility.

Construction

- Middle Band: 20-period SMA (default)

- Upper Band: Middle Band + (2 × 20-period standard deviation)

- Lower Band: Middle Band - (2 × 20-period standard deviation)

Statistically, ~95% of price action should fall within the bands (assuming normal distribution).

Key Signals

- Bollinger Squeeze: Bands narrow significantly — indicates low volatility and often precedes a sharp breakout. The direction of the breakout is not predicted by the squeeze itself

- Band Walk: Price riding along the upper or lower band signals a strong trend, not necessarily overbought/oversold

- W-Bottoms and M-Tops: Bollinger's signature patterns. A W-bottom forms when price hits the lower band, bounces, retests near the lower band (but at a higher RSI), then breaks above

- %B indicator: (Price - Lower Band) / (Upper Band - Lower Band). Ranges from 0 to 1; used for quantitative Bollinger analysis

Bandwidth

Bandwidth = (Upper Band - Lower Band) / Middle Band. When bandwidth reaches its 6-month low ('squeeze'), volatility expansion typically follows within 1-2 weeks.

Common Misconception

Touching the upper band does NOT automatically mean 'sell,' nor does touching the lower band mean 'buy.' In strong trends, price can 'walk the bands' for extended periods. Bollinger himself emphasizes using bands with other indicators for confirmation.

📊 ECONPLEX

Bollinger Bands

Technical Analysis

RSI (Relative Strength Index)

MACD (Moving Average Convergence Divergence)

Moving Average (MA)

Support & Resistance

Golden Cross

Dead Cross (Death Cross)