Bollinger Bands

Bollinger Bands were developed and trademarked by technical analyst John Bollinger in the early 1980s. The indicator consists of three lines plotted on a price chart: a middle band — typically a 20-period simple moving average of closing prices — and an upper and lower band each plotted at two standard deviations above and below the middle band, respectively. The standard deviation is calculated from the same 20-period data used for the moving average.

The defining characteristic of Bollinger Bands is that they expand and contract dynamically in response to changes in historical price volatility. During periods when a security's price has been historically volatile, the bands widen. During periods of historically subdued price action, the bands narrow. This makes Bollinger Bands a visual representation of the relationship between current price levels and the recent statistical distribution of prices.

Statistically, if prices were normally distributed, approximately 95 percent of closes would be expected to fall within two standard deviations of the mean — and therefore within the bands — simply by virtue of the mathematics of standard deviation. John Bollinger and many technical analysts have documented historical observations of 'band touches': instances where price reached the upper or lower band. Such touches do not, mathematically or empirically, imply a reversal; prices can 'walk the band,' meaning they can remain near the upper or lower band for extended periods during sustained trends.

A well-studied historical pattern with Bollinger Bands is the 'squeeze': a period during which the bands narrow significantly, historically associated in many markets with a subsequent period of elevated volatility. The squeeze is an observation about historical volatility cycles, not a forecast of the direction the subsequent price move will take.

Bollinger Bands are frequently used alongside other indicators such as RSI or MACD to attempt to provide additional context for analyzing historical price behavior. Like all technical indicators, they are mathematical summaries of past price data and carry no inherent predictive power regarding future prices.

Bandwidth and Squeeze: Bollinger Bandwidth is a derived indicator calculated as the difference between the upper and lower bands divided by the middle band, expressed as a percentage. A high bandwidth value indicates that the bands are wide relative to the middle average, reflecting a period of historically elevated price volatility. A very low bandwidth value — representing a narrow band squeeze — has historically appeared in U.S. equity charts before periods of significant directional price movement, because extended low-volatility consolidations have frequently preceded breakouts in historical data. Bollinger himself documented this tendency in his 2001 book 'Bollinger on Bollinger Bands.' The key limitation is that the squeeze identifies that elevated movement may be approaching based on historical patterns but does not indicate the direction of the subsequent move, making it a contextual rather than directional tool.

Historical Observations: John Bollinger and subsequent technical researchers documented several recurring historical patterns involving the bands and U.S. securities. One observation is the 'W-bottom' — a formation where price makes two successive lows near the lower band with the second low holding above the first, which has historically appeared at turning points in downtrends in the equities studied. The corresponding 'M-top' is the mirror pattern near the upper band. Another historical observation is that periods when an index or individual stock 'walks the upper band' — closing repeatedly near or above the upper band for multiple consecutive sessions — have historically characterized strong trending phases. These observations were derived from historical chart analysis and should be understood as descriptive patterns rather than reliable predictive frameworks.