What Bollinger Bands Are
Bollinger Bands are three lines plotted on a price chart: a 20-period simple moving average in the middle, and two outer bands placed two standard deviations above and below that average. The bands automatically widen during volatile periods and contract during calm ones, giving a visual gauge of how much the market is moving relative to its recent history.
What the Bands Actually Mean
By definition about 95% of price action falls inside the bands. Touches of the upper band mean price has stretched two standard deviations above its 20-day average. Touches of the lower band mean the opposite. But "high" does not automatically mean "sell" and "low" does not mean "buy." In strong trends, price rides the upper band for weeks.
The Bollinger Squeeze
When the bands contract to a multi-month low, volatility has compressed. The market is consolidating and a directional move usually follows. The squeeze itself does not tell you which way price will break; it tells you that a break is coming. Pair the squeeze with another signal — a breakout above resistance, a momentum indicator turning up, or volume confirmation.
Mean Reversion vs Trend Following
In ranging markets you can fade touches of the outer bands toward the middle. In trending markets prices ride one band for extended periods and the middle band acts as support (uptrend) or resistance (downtrend). Misidentifying the regime is the most common Bollinger Bands mistake.
Practical Settings
The default 20-period SMA with two-sigma bands works on most timeframes. Resist tuning parameters per chart — the value of Bollinger Bands comes partly from being a widely-watched standard.