Bollinger Bands¶

OVERVIEW¶

Bollinger Bands are a volatility indicator consisting of three lines plotted around a price series. Developed by John Bollinger in the 1980s, the bands dynamically expand and contract as market volatility rises and falls, providing a statistically grounded envelope for assessing whether price is extended relative to its recent history.

Note

Bollinger Bands do not signal direction. A close above the upper band is not inherently bearish — in strong uptrends, price can walk the upper band for extended periods. The indicator is entirely backward-looking and quantifies where price has been, not where it is going.

FORMULA¶

Standard parameters use a 20-period lookback and ±2 standard deviations.

Band	Calculation
Middle Band	20-period SMA of closing prices
Upper Band	20-period SMA + (2 × 20-period standard deviation)
Lower Band	20-period SMA − (2 × 20-period standard deviation)

Derived metrics:

Metric	Formula	Interpretation
%B	(Price − Lower Band) / (Upper Band − Lower Band)	Above 1.0 = price above upper band; below 0 = price below lower band; 0.5 = midpoint
Bandwidth	(Upper Band − Lower Band) / Middle Band	Extremely low readings signal volatility compression

Tip

Bandwidth reaching multi-month lows indicates a Bollinger Band squeeze — historically a precursor to a significant directional expansion. The tighter the squeeze, the larger the typical subsequent move.

WORKED EXAMPLE¶

SPY closes at $521.40. The 20-session average close is $518.00 and the 20-session standard deviation is $6.80.

Output	Calculation	Result
Upper Band	$518.00 + (2 × $6.80)	$531.60
Lower Band	$518.00 − (2 × $6.80)	$504.40
%B	($521.40 − $504.40) / ($531.60 − $504.40)	0.625

SPY sits 62.5% of the way up the band range — above the midpoint but not near the upper band. A close above $531.60 would represent a statistically unusual upward extension, exceeding two standard deviations above the 20-day mean.

HOW TO USE¶

Tapeboard surfaces Bollinger Bands across all supported instruments. Three primary trading approaches apply:

Squeeze Breakout

Watch for Bandwidth to compress to multi-month lows, then enter in the direction of the first decisive break beyond either band on rising volume.

Mean Reversion

Fade price when it touches or breaches an outer band, targeting a return to the middle band (20-day SMA). This approach performs best in range-bound, low-trend environments.

Swing Entry Filter

Combine %B with a momentum oscillator to qualify entries.

Condition	Signal
%B below 0.20 + RSI rising	Oversold setup with momentum turning up
%B above 0.80 + RSI falling	Overbought setup with momentum turning down

Note

Changing the standard deviation multiplier from 2.0 to 1.5 dramatically increases the frequency of band touches. Parameter choice materially affects any trading rule built around this indicator. Tapeboard defaults to 20-period / ±2 standard deviations.

LIMITATIONS AND COMMON MISCONCEPTIONS¶

Misconception	Reality
A close above the upper band is a sell signal	Price walks the upper band for weeks in strong uptrends
Bands predict future price direction	Bands are backward-looking; they measure historical volatility only
Any band touch is actionable	Mean-reversion setups require trend context to filter false signals
Default parameters are universal	Multiplier and lookback period must be matched to the instrument and timeframe

[What is RSI?]
[What is MACD?]
[What is VWAP?]
[What is Implied Volatility?]