Bollinger Bands: Reading Volatility

Bollinger Bands take a simple idea — a moving average — and wrap it in a volatility envelope. The result shows you, at a glance, whether price is calm or stretched, and often warns when a big move is brewing.

Paint them on the chart.

What the three lines are

• The middle band is just a 20-period simple moving average — the trend line from earlier lessons.
• The upper and lower bands sit two standard deviations above and below it. Standard deviation is a measure of how spread-out recent prices are — in plain terms, how volatile the market is right now.

Because the bands are built from volatility, they breathe: when the market is wild, the bands widen; when it's quiet, they pinch together.

Two things they tell you

1. Stretch. Price tagging the upper band means the move is extended relative to recent volatility — not a sell signal (in a strong trend price "rides" the upper band for a long time), but a heads-up that it's stretched. Same for the lower band on the downside.

2. The squeeze. This is the useful one. When the bands pinch tight, volatility has collapsed — the market has gone quiet and coiled. Quiet periods don't last; a squeeze is often the calm before a sharp expansion. Traders watch a squeeze not to predict direction, but to know a big move is likely coming, so they're ready when price breaks out of the range.

On the chart, find a stretch where the bands narrow to a ribbon, then notice what price does next — it usually breaks out hard in one direction.

Bollinger Bands don't tell you which way — they tell you how much. Pair a squeeze (a move is coming) with market structure or a support/resistance break (which way) and you've turned "something's about to happen" into an actual plan.

Next: Fibonacci retracement — mapping where pullbacks pause.

In the lab

The bands' width is a dial, not a fact. Turn it and watch what "extreme" means.

In Indicators, raise BB σ mult from 2 to 3 — the envelope widens until price almost never tags it: "extreme" now means really extreme. Drop it to 1 and price pokes out constantly. The standard 2σ setting is popular because ~95% of prices stay inside if returns were normal — crypto's aren't, which is exactly why band touches are information, not signals.