Bollinger Bands
In simple terms
Bollinger Bands are lines drawn above and below a price chart to show how wild or calm a cryptocurrency's price swings are. Think of them like guardrails that move closer together when the market is quiet and spread apart when prices are jumping around a lot.
Definition
Volatility-based envelope around a moving average — bands widen in volatile markets and narrow in calm ones.
In depth
Bollinger Bands consist of three lines: a simple moving average (typically 20 periods) in the center, with an upper and lower band positioned two standard deviations away from that average. As price volatility increases, the standard deviation widens, causing the bands to expand outward; conversely, during low-volatility periods, the bands contract. Traders use band touches or breaches as potential reversal signals, with prices near the upper band suggesting overbought conditions and prices near the lower band suggesting oversold conditions, though confirmation from other indicators is recommended for reliable trading decisions.
How does Bollinger Bands work?
Bollinger Bands start with a middle line, usually a 20-period simple moving average of closing prices. The same 20 closes are then used to calculate a standard deviation, a measure of how far prices have been spreading from that average. The upper band is the average plus two standard deviations; the lower band is the average minus two. Because the deviation is recalculated every period, the bands widen automatically when swings grow and contract when the market goes quiet. A touch of a band simply means price is roughly two deviations from its recent mean.
An example
An illustrative asset has a 20-day average of $50 and a standard deviation of $4 over the same window. The upper band sits at $58 and the lower at $42, a $16 span. Trading then quiets down and the standard deviation falls to $1.50, so the bands narrow to $53 and $47. The bands contracted without the average moving at all — the change reflects volatility, not direction.
Figures are illustrative only.
What beginners get wrong
- A touch of the upper band is not evidence something is overpriced; in strong trends price can ride the band for many sessions.
- Squeezes indicate that volatility has compressed, not which way an eventual move will go — breaks happen in both directions.
- Widening the multiplier from two deviations to three until signals appear fits the tool to a conclusion rather than measuring anything.
- On thinly traded assets with erratic data the standard deviation is unstable, so bands can jump for reasons unrelated to any trend.
Related terms
Part of
What is technical analysis, and how are crypto charts read? — the subject page for technical analysis, with all 29 of its definitions in one place.
Educational only — not financial advice.