What Are Bollinger Bands?
In short
Bollinger Bands are a volatility envelope drawn around a moving average: a middle band and two outer bands set a fixed number of standard deviations above and below it.
Bollinger Bands were created by John Bollinger. The middle band is a simple moving average of the closing price, by default over 20 bars. The upper and lower bands lie 2 standard deviations of the same closing prices above and below the middle band, so the envelope widens when prices have been moving a lot and narrows when they have been quiet.
Because the bands use the standard deviation of recent prices, they describe relative position: price near the upper band is high relative to the recent average and price near the lower band is low relative to it. Bollinger's own rules state that a tag of a band is not by itself a trading signal in either direction and that the bands should be read together with other, unrelated evidence. The distance between the outer bands, called bandwidth, is a separate measure of how volatile the recent window has been.
The defaults of 20 bars and 2 deviations are a starting point that can be changed; the author notes that a different average length calls for a different multiplier. During a strong trend the price can travel along one band for some time, so a move outside the bands does not by itself mean that a reversal is due.
Formula
Middle band = SMA(close, N) (default N = 20)
Upper band = Middle band + K * stddev(close, N) (default K = 2)
Lower band = Middle band - K * stddev(close, N)
Bandwidth = (Upper band - Lower band) / Middle bandThe formula is shown as code; N stands for the number of bars or periods.
Figures used in this guide
- 2
- default number of standard deviations between the middle band and each outer band
- 20
- default length of the moving average and of the standard deviation window, in bars
Each number in the text is a definition, a convention or a stated value of the source, not a market observation.
How Lzzo.com shows it
Lzzo.com does not currently draw Bollinger Bands on its charts or calculate them. Its Technical indicators section lists the 20 bar average among its simple moving averages and shows Wilder's ATR as a volatility measure in price units; both relate to what the bands describe. The moving averages and ATR guides explain how those values are calculated.
Related guides
Sources
- John Bollinger, Bollinger on Bollinger Bands (McGraw-Hill, 2001)
- John Bollinger, Bollinger Band Rules (bollingerbands.com)
Primary and official sources, named as plain text.