How Are Bollinger Bands Constructed?
Default 20-period SMA middle band. Upper band = middle + (2 × standard deviation of closes). Lower band = middle − (2 × standard deviation). About 95% of closes statistically fall within ±2 standard deviations in normal distributions—markets are not normal, but the bands still frame typical range. When volatility falls, bands narrow—a squeeze. When volatility expands, bands widen—often during breakouts. Band width is a standalone volatility measure some traders plot separately.
Price can walk the upper band in strong trends—touching upper band is not automatically a short signal.
What Is a Bollinger Band Squeeze?
Squeeze: band width reaches multi-week low—energy coiling before expansion. Traders watch for close outside a band with volume for directional bet. False breaks occur—wait for retest hold or second-bar confirmation depending on your rules. Squeeze logic pairs well with Donchian breakout and relative volume filters. Not every narrow range explodes; low ADX environments produce many failed squeeze signals.
Measure squeeze objectively—lowest band width in 120 bars—so you are not eyeballing every tight range as special.
How Do Mean Reversion Traders Use the Bands?
In ranges, tag of lower band with RSI oversold and support confluence can offer long with target middle band or upper band. Short near upper band in confirmed downtrend or range top. %B indicator shows where price sits within bands (0 = lower, 1 = upper)—useful for scan ranking. Mean reversion fails when trend accelerates—always define stop beyond the band pierce that invalidates range thesis.
After three consecutive closes outside a band, trend mode may have started—switch from fade rules to continuation rules.
How Do Bollinger Bands Relate to ATR and Keltner Channels?
Bollinger uses standard deviation of price; Keltner uses ATR around an EMA—different volatility math, similar envelope idea. ATR sizes absolute stop distance; band width sizes relative stretch. Some traders require Keltner inside Bollinger for squeeze definition. Use ATR multiples for stops when trading band tags—band pierce plus 0.5 ATR beyond wick is a common invalidation template.
Do not stack Bollinger, Keltner, and Donchian visually—pick one envelope system for signals and one for stops.
What Settings and Mistakes Apply?
20,2 is standard; 20,2.5 reduces tag frequency on volatile small caps. Changing period to 10 speeds bands—more signals, more noise. Mistakes: shorting upper band touches in headline-driven runners; ignoring middle band as exit target; trading squeezes without volume. Bands adapt to past volatility—sudden news can gap beyond bands without mean reversion for days.
Journal band trades by regime: range versus trend labels explain most rule failures faster than tweaking standard deviation by 0.1.