Bollinger Bands Definition

Bollinger Bands are a chart overlay that wraps price with three lines to show how volatile a market is and where price sits relative to its recent average. Traders watch the bands to spot calm periods, bursts of activity, and possible overbought or oversold moments.

Origin and developer

Market technician John Bollinger introduced the tool in the early 1980s and later made it a staple of technical analysis in both traditional markets and the cryptocurrency industry.

What the bands are made of

The indicator draws a middle line based on a moving average. Above and below that line sit two bands set at a distance that comes from standard deviation, which is a simple way to measure how spread out recent prices are. When prices start swinging more, the bands move farther apart. When trading quiets down, they pull in.

How traders read the bands

Many traders use band touches as context. If price presses the upper band, the market might be running hot. If it tags the lower band, it might be running cold. The central line often acts like a dynamic area where price pauses or bounces, and the upper and lower bands can line up with zones of support or resistance on the chart. None of these readings is guaranteed, but they give a quick feel for conditions.

The squeeze

A well-known pattern is the “squeeze,” which shows up when the bands contract tightly. This usually signals a low-volatility phase that can precede a larger move. Traders watch for a breakout from a squeeze to determine which direction momentum will take next.

Crypto use cases

In crypto, where volatility can change fast, the bands help put big swings into context. People use them to gauge whether current action is stretched or calm and to build simple mean-reversion or trend-confirmation ideas around that view. The concept is the same as in other markets, only the speed of change can be higher.

Not a stand-alone signal

Bollinger Bands look back at recent prices, so they lag. On their own, they do not predict the future. Many traders pair them with other tools or basic market structure to reduce false signals and to avoid treating every band touch as a trade.

A lightweight example

Imagine a chart where the middle line is a 20-day moving average. If the price rallies well above that average and hovers near the upper band while the bands are widening, volatility is increasing, and the trend has some strength. If the price then drifts back toward the middle, the move may be cooling. This type of step-by-step approach is how bands are commonly used in practice.

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