Bollinger Band

Bollinger Bands are a popular technical analysis tool created by financial analyst John Bollinger in the 1980s. They consist of three lines plotted directly onto a price chart: a middle line (a moving average of recent prices, typically over 20 periods), and two outer bands positioned above and below at a distance of two standard deviations. The outer bands automatically expand when price movements are volatile and contract when the market is calm and quiet.

The core insight is that prices tend to stay within the bands most of the time — roughly 95% of all price action statistically falls between them. When price touches or breaks through the upper band, it may signal that the asset is overbought or that a big move is underway. When it touches the lower band, it may suggest oversold conditions. Traders also watch for a “squeeze” — when the bands narrow very close together — as this often precedes a sharp breakout in one direction, though the bands themselves don’t tell you which direction that will be.

Example: Imagine you’re tracking how long your daily commute takes. Most days it’s between 20 and 40 minutes — that’s your normal band. On days when there’s a snowstorm or a concert, your commute shoots outside that normal range. Bollinger Bands do the same thing for asset prices: they show you the “normal range” and alert you when prices are behaving unusually.