Technical & Chart AnalysisBBBollinger Band
Bollinger Bands
A 20-period moving average with bands two standard deviations above and below, so width tracks volatility.
What Bollinger Bands means
Bollinger Bands, created by John Bollinger, consist of a centre line and two outer bands. The default construction uses a 20-period simple moving average with the upper and lower bands set two standard deviations of price above and below it. Because standard deviation is recalculated each period, the bands expand when the market becomes volatile and contract when it quietens. The crucial point is that band width measures volatility, not direction: widening bands say only that the market is moving more, not which way it intends to go.
Common applications include the squeeze, where an unusually narrow band width flags contracted volatility that often precedes a directional expansion, and using the centre line as a dynamic reference for trend. Bollinger himself stressed that a tag of the upper band is not a sell signal, since price can walk up the band throughout a strong trend. Treating the bands as automatic mean-reversion boundaries is the most frequent misuse, and because FX returns are fatter tailed than a normal distribution, the two-deviation band contains fewer observations than textbook statistics imply.
Worked example
With the 20-period SMA of EUR/USD at 1.0850 and the standard deviation at 0.0025, the upper band is 1.0900 and the lower band 1.0800, giving a 100-pip envelope that narrows sharply during a quiet Asian session.
Related terms
- VolatilityThe magnitude of price fluctuation over a period, usually measured as the standard deviation of returns or as an average range.
- Simple Moving Average (SMA)The unweighted mean of the last N closing prices, recalculated each period as the window rolls forward.
- ConsolidationA phase of sideways, low-range trading in which price pauses and volatility contracts before the next directional move.
- BreakoutA move of price decisively through an established support, resistance or consolidation boundary.
- Mean ReversionA strategy family that assumes price stretched far from an average will tend to return toward it, so extremes are faded.
Frequently asked questions
What does Bollinger Bands mean in forex trading?
A 20-period moving average with bands two standard deviations above and below, so width tracks volatility.
How does Bollinger Bands work in practice?
Common applications include the squeeze, where an unusually narrow band width flags contracted volatility that often precedes a directional expansion, and using the centre line as a dynamic reference for trend. Bollinger himself stressed that a tag of the upper band is not a sell signal, since price can walk up the band throughout a strong trend. Treating the bands as automatic mean-reversion boundaries is the most frequent misuse, and because FX returns are fatter tailed than a normal distribution, the two-deviation band contains fewer observations than textbook statistics imply.
What is an example of Bollinger Bands?
With the 20-period SMA of EUR/USD at 1.0850 and the standard deviation at 0.0025, the upper band is 1.0900 and the lower band 1.0800, giving a 100-pip envelope that narrows sharply during a quiet Asian session.
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