Bollinger Bands
An indicator that draws bands above and below a moving average by the amount of volatility, showing whether the price is higher or lower than usual.
Middle line = 20-day moving average (SMA)
When the price touches the upper band, it is seen as sitting higher than usual in the short term (overheated); when it touches the lower band, as sitting lower (depressed).
In plain terms
It places a moving average in the middle and draws bands above and below it by "how much the price has been swinging lately (volatility)." When the price swings a lot, the bands widen; when it is quiet, they narrow.
When the price touches the upper band, it is sitting higher than usual; when it touches the lower band, it is sitting lower than usual. (Here, "standard deviation" is a figure that measures how spread out values are from the average.)
What it tells you
It shows how far the current price has strayed above or below its recent average, and whether volatility is growing or shrinking.
When the bands narrow for a while (quiet) and then suddenly widen, it is sometimes read as a sign that a large move has begun.
Formula
Middle line = 20-day moving average (SMA) Upper band = 20-day average + (standard deviation × 2) Lower band = 20-day average − (standard deviation × 2)
What high or low means
When the price touches the upper band, it is seen as sitting higher than usual in the short term (overheated); when it touches the lower band, as sitting lower (depressed).
That said, in a strong trend the price can ride one band for a long stretch, so touching a band does not mean the direction changes right away.
Touching a band is not itself a buy or sell signal. In a strong trend, the price can cling to the upper band (or the lower band) and keep going for quite a while.
Like RSI and MACD, it only looks at price and volatility, not at the company's value. "Lower than usual" does not mean "a price below value."
It is a reference tool for reading short-term movement. Its nature differs from the material used for long-term investment judgments.
Metrics to read alongside
See it in real stocks
Search US stocks on Stocklore to see Bollinger alongside the sector benchmark.
This explanation is for information and reference only and is not a recommendation to buy or sell any security. Investment decisions and their consequences are your own.