Bollinger Bands Guide: Volatility and Mean Reversion
Bollinger Bands wrap price in a volatility envelope around a moving average. Learn the formula, the bands, and the squeeze that precedes breakouts.
Bollinger Bands Guide: Volatility and Mean Reversion
Price doesn't just trend — it stretches and snaps. Bollinger Bands measure that stretch.
Developed by John Bollinger in the 1980s, Bollinger Bands are a volatility indicator built around a moving average. They expand when volatility rises and contract when it falls — making them a visual map of market mood.
The components
A Bollinger Band has three lines:
- Middle band = 20-period SMA (the mean)
- Upper band = middle band + (2 × standard deviation)
- Lower band = middle band − (2 × standard deviation)
The formula
Upper Band = SMA(20) + 2 × StdDev(20)
Lower Band = SMA(20) − 2 × StdDev(20)
Standard deviation measures how spread out the prices are around the mean. When prices get more volatile, StdDev grows and the bands widen. When things calm down, StdDev shrinks and the bands tighten.
Worked example:
| Value | Number |
|---|---|
| SMA(20) | $100 |
| StdDev(20) | $2 |
| Upper band | $100 + (2 × $2) = $104 |
| Lower band | $100 − (2 × $2) = $96 |
What the bands tell you
| Band behaviour | Meaning |
|---|---|
| Bands widen | Volatility rising — trend forming |
| Bands squeeze together | Volatility low — breakout imminent |
| Price tags upper band | Stretched high — overbought in a range |
| Price tags lower band | Stretched low — oversold in a range |
| Price rides the band | Strong trend — do not fade it |
Two ways to trade the bands
1. Mean reversion (in a range)
- Buy when price touches the lower band
- Sell when price touches the upper band
- Target the middle band (the mean)
- Only do this in a flat, ranging market
2. Trend riding (in a trend)
- In a strong uptrend, price "rides" the upper band
- Treat pullbacks to the middle band as buy opportunities
- Do not short just because price touched the upper band — that's the biggest Bollinger mistake
The 2-standard-deviation idea
Statistically, about 95% of price action falls within two standard deviations of the mean. So a tag of the band is, by definition, an unusual event — which is exactly why it's worth attention.
Common mistakes
- Shorting the upper band in an uptrend — bands can "walk" up for days
- Using default 20/2 settings blindly on every timeframe
- Ignoring the squeeze — the most powerful Bollinger signal
- No trend filter — mean reversion fails in trends
How to start
- Add the 20, 2 Bollinger Bands to a daily chart
- Mark whether the market is trending or ranging (use the ADX)
- Mean-revert in ranges; ride the band in trends
- Always set a stop beyond the band — the stop loss calculator keeps risk fixed
Summary
Bollinger Bands are a volatility envelope. They expand with action and contract before breakouts. Mean-revert the tags in ranges, ride the band in trends, and watch for the squeeze — it's where the biggest moves begin.