Bollinger Bands: Volatility-Scaled Price Envelopes

Summary

Bollinger Bands place an upper and lower boundary around a moving average, with each boundary offset by a chosen multiple of the price standard deviation. Because the offset responds to recent volatility, the bands widen during more volatile periods and contract during quieter periods, unlike fixed percentage envelopes.

The document describes possible interpretations: contractions may precede abrupt price moves, a break above the upper band may accompany trend continuation, and a move back inside after excursions outside may warn of reversal. It also notes that movement from one band can sometimes reach the other. These are presented as tendencies, not guaranteed signals, and no empirical testing or risk rules are supplied. The suggested setup uses a 20-period simple moving average and boundaries two standard deviations away; shorter averages are described as having little effect.

Key ideas

• The bands are set around a moving average using a multiple of standard deviation.
• Their width expands and contracts with changing price volatility.
• A volatility contraction may precede a sharp price move, though no guarantee is given.
• Band breaks and returns inside the bands are described as possible trend or reversal clues.
• The document suggests a 20-period simple average with boundaries two standard deviations away.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.