Bollinger Bands

What Are Bollinger Bands?

Bollinger Bands were developed by John Bollinger in the 1980s and consist of three lines plotted on a price chart. The middle band is a 20-period simple moving average. The upper band is the middle band plus two standard deviations, and the lower band is the middle band minus two standard deviations. Statistically, approximately 95% of price action falls within the bands.

The bands automatically widen when volatility increases and narrow when volatility decreases. This adaptive behavior makes them particularly useful in crypto markets, where volatility can change dramatically within hours. Narrow bands — called a "squeeze" — signal that a large price move is approaching, though they do not indicate direction.

How Bollinger Bands Work

When the price touches or breaks through the upper Bollinger Band, the asset is considered extended to the upside and may be overbought. When it touches the lower band, it may be oversold. However, in strong trends, the price can "walk the band," staying near the upper band in uptrends or the lower band in downtrends for extended periods.

The Bollinger Band squeeze is one of the most powerful signals. When the bands contract to their narrowest width in recent history, it indicates that volatility is compressed and a breakout is imminent. Traders watch for the price to break above or below the bands after a squeeze to enter the emerging trend. Combining the squeeze with volume analysis and RSI significantly improves breakout trade accuracy.

Why Bollinger Bands Matter

Bollinger Bands provide a volatility-adjusted framework for assessing whether a price move is significant. A 5% move in a low-volatility period may push the price outside the bands and signal a trend change, while the same 5% move during high volatility might stay within the bands and be considered normal noise. For crypto traders, this context is invaluable when deciding whether to chase a pump or wait for a pullback.