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Bollinger Bands

A moving average with bands plotted two standard deviations above and below it, showing how stretched price is relative to recent volatility.

Bollinger bands squeezing and then expandingA price line between three curves: an average in the middle and a band above and below it that pinch together in the centre of the chart and then spread apart as the price runs higher.PRICE WITH BOLLINGER BANDS (20, 2)SQUEEZEupper bandpricemiddle band20-day averagelower bandbands widen asvolatility risesIllustrative prices. The bands sit two standard deviations from the average.
Bollinger bands: squeeze and expansion. The middle line is a 20-day average and the outer bands sit a set number of standard deviations away, so they measure how far price has recently been straying. When moves are small the bands pinch together; when moves grow they spread apart.

The default is a 20-period moving-average with bands at +2 and -2 standard deviations. When volatility falls the bands squeeze; when it rises they expand. About 95% of closes fall inside the bands, by construction.

A touch of the band is not a reversal signal. In a trend, price can walk along the upper band for many bars. The squeeze is more often used as a setup for an upcoming breakout.

Example: 20-day SMA is $100 with a $3 standard deviation. Bands sit at $94 and $106. A close at $107 is unusual, but in a strong trend the next close could be $109.

Related: moving-average, volatility, atr, mean-reversion

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