Bollinger bands, explained
Bollinger bands are the shaded band that hugs the price on many charts. They answer one question: is the price unusually stretched right now, compared with its recent normal?
How they're built
- Middle line: the average closing price of the last 20 candles (a moving average).
- Upper band: the middle line plus two standard deviations.
- Lower band: the middle line minus two standard deviations.
"Standard deviation" is just a measure of how jumpy the price has been. Jumpy market, wide band. Calm market, narrow band.
What beginners get wrong
The classic mistake: "the price touched the upper band, so it must fall." Not necessarily. In a strong trend, the price can ride along the upper band for a long time. Touching a band means stretched, not about to reverse.
The squeeze
When the band gets very narrow, the market has gone quiet. Quiet periods often end with a bigger move, but the band doesn't tell you which direction. A squeeze says "something may happen soon", nothing more.
How to use them sensibly
- Use the band to judge how stretched a move is, not as a buy or sell button.
- Check the trend first. In an uptrend, the lower band is more interesting than the upper one.
- Don't stack five indicators that all measure the same thing. More lines is not more insight.
Where you'll see this in Nicholas
The blue band on Nicholas's live chart is a Bollinger band. Tap it to hear what it means right now. The Academy's "Candles and Bands" unit covers it with examples.