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Bollinger Bands

Bollinger Bands are a volatility indicator consisting of a middle band (Simple Moving Average) and two outer bands placed at a specified number of standard deviations above and below the middle. The bands dynamically widen when volatility increases and narrow when volatility decreases, providing a visual envelope of “normal” price behavior.

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How It Works

The three components are calculated as follows:
The standard deviation measures how much closing prices have varied from the mean over the lookback window. When prices are stable, σ is small and the bands are tight. When prices swing wildly, σ is large and the bands expand.

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Statistical Foundation

With stdDev: 2 (the default), approximately 95% of closing prices should fall within the bands under a normal distribution assumption. In practice, financial data is not perfectly normal (fat tails are common in crypto), so prices exit the bands more frequently than 5% — but each exit still represents a statistically significant deviation.

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Indicator Type

Overlay — Bollinger Bands are drawn directly on the price chart, wrapping around candlesticks.

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Settings

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Parameter Combinations

The default 20/2.0 combination works well for most situations. Only change these values if you have a specific reason — for example, widening stdDev to 2.5 on a highly volatile altcoin to avoid excessive band touches.

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Interpretation

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The Bollinger Squeeze

The most powerful Bollinger Bands signal is the squeeze — when bands narrow to their tightest point in recent history:
  1. Bands contract: Volatility has dropped to a low. Price is consolidating in a tight range.
  2. Breakout: Price breaks out of the squeeze, usually accompanied by a volume spike.
  3. Bands expand: Volatility returns. The direction of the breakout indicates the new trend.
A squeeze often precedes the most explosive moves. The longer the squeeze persists, the more powerful the subsequent breakout tends to be.

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Band Walks

In a strong trend, price can “walk” along one of the outer bands:
  • Upper band walk: Price consistently touches or exceeds the upper band. This is a sign of strong bullish momentum, not an automatic sell signal.
  • Lower band walk: Price consistently touches or hugs the lower band. Strong bearish momentum, not an automatic buy signal.
Band walks typically end when price closes back inside the bands and the middle band begins to flatten.

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Mean Reversion Signals

In ranging (non-trending) markets, Bollinger Bands excel as mean-reversion indicators:
  • Price touches upper band in a range → potential short entry, targeting the middle band.
  • Price touches lower band in a range → potential long entry, targeting the middle band.
  • The middle band (SMA) acts as the natural mean-reversion target.
The critical distinction is context: band touches in a trend are continuation signals (band walk), while band touches in a range are reversal signals (mean reversion). Determine the market context before acting on band touches.

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Bandwidth and %B

Two derived metrics help quantify Bollinger Band signals: Bandwidth measures how wide the bands are relative to the middle:
Low Bandwidth values indicate squeezes. Monitoring Bandwidth over time helps identify when a squeeze is forming before it becomes visually obvious. %B measures where price sits within the bands:
  • %B > 1.0: Price is above the upper band.
  • %B = 0.5: Price is exactly at the middle band.
  • %B < 0.0: Price is below the lower band.

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Alerts

Bollinger Bands support the following alert rules: Enable alerts in the indicator settings dialog under the Alert section. Set a cooldown to avoid repeated alerts during band walks.
Price touching the bands is not an automatic buy or sell signal. In strong trends, price will walk along a band for extended periods. Always assess whether the market is trending or ranging before interpreting band touches as reversal signals.

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Combining with Other Indicators

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Practical Considerations

  • Not a standalone system: Bollinger Bands describe volatility, not direction. They tell you when the market is stretched, not which way it will go. Always combine with directional indicators or price action.
  • Crypto volatility: Crypto markets are inherently more volatile than equities. The default 2.0 standard deviations may produce frequent band touches on lower timeframes. Consider 2.5 for altcoins.
  • Multi-timeframe: A squeeze on the daily chart is more significant than one on the 5-minute chart. Check higher timeframes to calibrate expectations.
  • False squeezes: Not every squeeze leads to a trend move. Some squeezes resolve with a brief spike followed by more ranging. Volume confirmation (a meaningful increase on the breakout bar) helps distinguish real breakouts from false ones.
  • Lookback startup: The indicator needs at least period bars to calculate the first valid value. The standard deviation stabilizes after approximately 2 × period bars.

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Common Mistakes

  1. Shorting upper band touches in uptrends — band walks can persist for days. Wait for price to close back below the upper band and the middle band to flatten.
  2. Using in isolation — Bollinger Bands do not predict direction. A squeeze tells you “something is about to happen,” not “which way.”
  3. Ignoring the middle band — The SMA (middle) is often the strongest support/resistance on the chart and the primary mean-reversion target.
  • SMA — The middle band is an SMA; understanding SMA behavior helps interpret Bollinger Bands
  • RSI — Momentum oscillator that pairs well with band touch signals
  • VWAP — Volume-weighted mean for intraday confluence
  • MACD — Momentum confirmation for squeeze breakouts