Bollinger Bands Explained: Squeeze, Band Walks & Signals
What are Bollinger Bands?
Bollinger Bands are a volatility indicator made of a 20-period simple moving average with an upper and lower band plotted 2 standard deviations above and below it. The bands widen when the market is volatile and contract when it is quiet, so they show whether price is high or low relative to its own recent behaviour. They do not predict direction — they describe volatility and give context for other signals.
The indicator was created by John Bollinger in the early 1980s. With default settings roughly 90% of closes fall inside the bands, but that is a tendency, not a rule: a close outside the bands is information, not an automatic signal.
How the bands are calculated
- Middle band: the 20-period simple moving average (SMA) of closing prices.
- Upper band: middle band + 2 × the standard deviation of the last 20 closes.
- Lower band: middle band − 2 × the same standard deviation.
For example, if the 20-period SMA on EUR/USD is 1.0850 and the standard deviation of those 20 closes is 0.0020 (20 pips), the upper band is 1.0850 + 0.0040 = 1.0890 and the lower band is 1.0850 − 0.0040 = 1.0810, giving a band 80 pips wide. If volatility doubles, the band doubles in width without any change in trend. The middle band behaves like any of the moving averages you may already use, and the band width tells a similar story to the ATR indicator: both measure how much price is moving, not where it is going.
The squeeze: quiet before expansion
Volatility moves in cycles. Quiet periods tend to be followed by active ones, and the squeeze is how the bands show it: they pinch together until the band is unusually narrow compared with its recent history. A squeeze tells you that a larger move is becoming more likely; it says nothing about which way.
The practical approach is to mark the high and low of the squeeze range and wait for a decisive close outside it, ideally in the direction of the higher-timeframe trend. Be alert to the head fake — a brief push out of one side that reverses and breaks the other way. Squeezes often form ahead of scheduled events, so check the economic calendar before assuming a quiet market is a technical setup.
Walking the band in trends
The most expensive misunderstanding about Bollinger Bands is that a touch of the upper band is a sell signal and a touch of the lower band is a buy signal. In a strong uptrend, price can close at or near the upper band candle after candle while the band itself slopes upward. This is called walking the band, and it is a sign of strength, not exhaustion. Selling each touch in that environment means repeatedly fading a trend.
During a band walk, pullbacks often reach only as far as the middle band before the trend resumes, which makes the 20-period SMA a useful reference for trend-following entries and trailing stops. A warning that the walk may be ending comes when price can no longer reach the outer band on a new push and then closes beyond the middle band.
Mean reversion in ranges
When the market is genuinely sideways — the middle band is flat and the bands run roughly parallel — price tends to oscillate between the outer bands, and fading the extremes becomes a reasonable idea. Even then, wait for evidence rather than selling the first touch: a rejection wick or a close back inside the band, preferably at a level you have already marked as support or resistance. The middle band is a natural first target and the opposite band a second. Place the stop beyond the recent extreme, and stand aside if the bands begin to widen sharply, because that often marks the start of a breakout rather than another swing within the range.
W-bottoms and M-tops
These are the band-based versions of the double bottom and double top covered in chart patterns.
- W-bottom: price makes a first low at or below the lower band, rallies towards the middle band, then makes a second low that holds inside the lower band — even if that low is slightly lower in price. The second low is weaker relative to the bands, showing that selling pressure is fading. The pattern is confirmed by a close above the high between the two lows.
- M-top: the mirror image. A first high tags or exceeds the upper band, price pulls back, and a second high fails to reach the band. Confirmation is a close below the low between the two highs.
%B and bandwidth in brief
Two derived readings put numbers on what your eye sees. %B shows where price sits within the bands: %B = (price − lower band) ÷ (upper band − lower band). Using the example above, a price of 1.0870 gives (1.0870 − 1.0810) ÷ (1.0890 − 1.0810) = 0.0060 ÷ 0.0080 = 0.75, meaning price is three-quarters of the way up the band. A value above 1 is a close above the upper band; below 0 is a close beneath the lower band.
Bandwidth measures how wide the bands are relative to the middle: (upper band − lower band) ÷ middle band. Here that is 0.0080 ÷ 1.0850 ≈ 0.0074, or about 0.74%. Plotting bandwidth over time makes squeezes easy to spot, because you can see when it falls to a low for the period you are studying.
Combining with RSI or price action
Because the bands measure volatility, they pair well with a momentum tool. A common combination is the RSI indicator: a second low that holds inside the lower band while RSI makes a higher low is a stronger W-bottom than the band pattern alone. Equally, a band tag that is rejected with a clear reversal candle carries more weight than a tag without one — see price action trading for the candle structures worth waiting for. Avoid stacking several volatility tools together; they will simply tell you the same thing.
Common mistakes
- Treating every band touch as a reversal signal, especially against a strong trend.
- Assuming a squeeze predicts direction, or entering before the break is confirmed by a close.
- Ignoring the slope of the middle band, which tells you whether you are in a trend or a range.
- Tightening the bands to get more signals — you get more noise as well.
- Changing settings until past charts look perfect, then expecting the same fit in live trading.
- Using the bands as a complete system with no stop or position-sizing plan.
Whatever setup you take, define the exit before you enter; the guide to stop-loss strategies covers the options. Bollinger Bands describe volatility; they do not remove risk. Forex and CFDs carry a high risk of loss, and you should only risk money you can afford to lose.
FAQ
What are the best Bollinger Bands settings for forex?
The default of a 20-period simple moving average with bands 2 standard deviations either side is the usual starting point and works on any timeframe. Narrower bands produce more touches and more noise; wider bands produce fewer. Rather than hunting for perfect settings, keep the default and focus on reading trend and volatility context.
Is touching the upper Bollinger Band a sell signal?
No. In a strong uptrend price can close at or near the upper band for many candles in a row, known as walking the band, and that is a sign of strength. A band touch only becomes interesting for a fade when the market is ranging, the middle band is flat and price shows a clear rejection.
What is a Bollinger Band squeeze?
A squeeze is when the bands contract to an unusually narrow width because volatility has dropped. Quiet periods tend to be followed by more active ones, so a squeeze suggests a larger move is becoming more likely. It does not indicate direction, so traders wait for a decisive close outside the squeeze range before acting.
What do %B and bandwidth mean on Bollinger Bands?
%B shows where price sits within the bands: 1 is the upper band, 0 is the lower band and 0.5 is the middle. Bandwidth is the distance between the bands divided by the middle band, so it measures how wide the bands are. Falling bandwidth highlights a squeeze; rising bandwidth shows volatility expanding.