What it is
John Bollinger designed the bands to show whether a price is high or low compared with its own recent behaviour. The middle line is the average; the bands measure how spread out recent closes have been around it.
Standard deviation is a measure of spread. When closes are scattered widely, it is large and the bands move apart; when closes bunch together, it shrinks and the bands pinch in. That pinch, known as a squeeze, often comes before a bigger move, although the bands do not say which direction.
How it is calculated
Middle band: the simple moving average of the last 20 closes. Standard deviation: for the same 20 closes, take each close minus the average, square it, average those squares and take the square root. Upper band: middle band plus 2 x the standard deviation. Lower band: middle band minus 2 x the standard deviation. Both numbers can be changed in the settings.
Settings
| Setting | Default | Range | What it changes |
|---|---|---|---|
| length | 20 | 2 to 400 | How many closes the average and the spread are measured over. Shorter bands react faster and are touched more often. |
| width | 2 | 0.5 to 5 | How many standard deviations the bands sit from the middle. 2 contains most closes; 2.5 or 3 marks only the more extreme pushes. |
How to read it
How to trade it
- 1
Squeeze breakout: on a 15 minute gold chart, wait until the bands are the narrowest they have been in several sessions. The entry trigger is the first close outside a band, in that direction.
- 2
Stop on the other side of the middle band, or just inside the opposite band if the squeeze is very tight. On gold this is often 5 to 10 points at this timeframe.
- 3
Target: hold while closes stay outside or along the band you broke. Exit on the first close back through the middle line, or take 2 times the stop.
- 4
Range fade (only when the bands are flat and price is ranging): sell a close back inside the upper band, stop above that candle's high, target the middle band.
For a breakout, a close back inside the bands within the next two or three candles cancels it, and a close through the middle line ends it. For a fade, a second close outside the same band means the move is a trend, not a stretch, and the fade is wrong.
On WickSpeak, Bollinger Bands write a plain-English reading on the live candle: whether price is inside or outside, whether the bands are widening, how to trade it and what would prove it wrong. In Playbook you can test: price closes above the upper band, price closes below the lower band, price is inside the bands, price is above or below the middle of the bands, the bands are widening with the upper band rising, or widening with the lower band falling. Playbook can also test the bands with a rising Parabolic SAR (0.02, 0.2) below the lower band, or a falling Parabolic SAR above the upper band.
Best markets and timeframes
Bollinger Bands work on any market with steady price data. Squeeze breakouts suit gold, US30 and NAS100 on 5 minute to 1 hour charts; range fades suit forex pairs during quiet hours, when the bands run flat.
Common mistakes
- Selling every touch of the upper band in a strong trend. Price can walk the band for a long time.
- Assuming a squeeze tells you the direction. It only says a move is likely; wait for the close outside.
- Using the bands as the stop. Normal noise often pokes outside a band and back in.
Works well with
Questions traders ask
What are the best Bollinger Bands settings?
20 periods and 2 standard deviations is the standard and the setting most traders watch. Some day traders use 20 and 2.5 on fast charts to mark only the bigger pushes. Test any change over many trades before trusting it.
Is price touching the upper Bollinger Band a sell signal?
Not on its own. In a trend, price often rides the upper band for many candles. A touch only becomes a fade idea when the bands are flat, the market is ranging and price closes back inside.
What is a Bollinger Band squeeze?
It is when the bands move unusually close together because recent closes have barely spread. It shows volatility is low, which often comes before a bigger move. Bollinger bandwidth puts the width into one number so you can spot it.
Are Bollinger Bands good for gold?
Yes, gold's habit of quiet spells followed by sharp moves suits the squeeze breakout. Size stops from gold's ATR at the time rather than a fixed number of points, because its candle size changes a lot between sessions.