Bollinger Bands

Written By
Paul Tracy
Updated November 4, 2020

What are Bollinger Bands?

Bollinger Bands are used as a technical analysis indicator. They are formed by using a 20-day moving average as a centerline and then tracing two bands, each one standard deviation wide, on either side of the moving average. By watching the share price's interaction with these bands, technical analysts try to forecast price movements.

How Do Bollinger Bands Work?

Bollinger Bands are named after John Bollinger -- a well-known commentator and technical analyst. Bollinger built his work on a foundation laid by an influential researcher named Hurst, who discussed "trading envelopes." Hurst put these so-called "envelopes" around a stock (or index), surrounding it with a fixed percentage -- such as 3% or 4%. He noted that trading opportunities often arose when the stock reached one end of the envelope and then began to reverse.

Bollinger improved on this envelope theory by making it dynamic rather than fixed. He used a 20-period moving average, and then created bands that were based on standard deviations.

When a stock moves outside the upper-end of a Bollinger Band, it is considered "overbought." In other words, it has gone up too far, too fast. Such stocks are often vulnerable to profit taking. Conversely, when a stock drops below the lower band, it is considered "oversold." An oversold stock has gone down too far, too fast. These stocks often bounce higher when bargain-hunters jump in and purchase the shares

Traders often rely on several major principles related to Bollinger Bands:

1.  The bottom or top of the band is likely to provide support or resistance, just like a "horizontal" support or resistance level. In many cases, support or resistance can also be found at the 20-period moving average, which marks the center of the band.

2.  If a stock continues to close outside the band, this is a continuation signal. In other words, the shares are likely to continue trading in the same direction.

3.  When a particular stock reverses after closing outside the band, it often retreats to the opposite band before finding support.

4.  A narrowing of the bands suggests that the next move will be a volatile one. Swing traders should watch a stock with narrow bands carefully to identify the breakout from resistance or breakdown from support. This breakout or breakdown can often yield a profitable trade.

5.  Prices can often "ride" the band. Riding an upper band indicates strength; riding the lower band shows weakness.

Why Do Bollinger Bands Matter?

Bollinger Bands are an important technical tool for the trader that can help refine judgments based on classical technical analysis and indicators. When analyzing a chart, the five principles described above should be carefully applied. If used correctly, Bollinger Bands could tell a swing trader when he or she should buy or sell a particular security.

Activate your free account to unlock our most valuable savings and money-making tips
  • 100% FREE
  • Exclusive money-making tips before we post them to the live site
  • Weekly insights and analysis from our financial experts
  • Free Report - 25 Ways to Save Hundreds on Your Monthly Expenses
  • Free Report - Eliminate Credit Card Debt with these 10 Simple Tricks
Ask an Expert
All of our content is verified for accuracy by Paul Tracy and our team of certified financial experts. We pride ourselves on quality, research, and transparency, and we value your feedback. Below you'll find answers to some of the most common reader questions about Bollinger Bands.
Be the first to ask a question

If you have a question about Bollinger Bands, then please ask Paul.

Ask a question

Paul has been a respected figure in the financial markets for more than two decades. Prior to starting InvestingAnswers, Paul founded and managed one of the most influential investment research firms in America, with more than 3 million monthly readers.

If you have a question about Bollinger Bands, then please ask Paul.

Ask a question Read more from Paul
Paul Tracy - profile
Ask an Expert about Bollinger Bands

By submitting this form you agree with our Privacy Policy

Don't Know a Financial Term?
Search our library of 4,000+ terms