Bollinger Bands are a statistically-derived volatility measure — not a hand-drawn channel, but bands calculated directly from a stock's own recent price behavior.
The Formula
Middle band = 20-day simple moving average. Upper band = middle band + (20-day standard deviation × 2). Lower band = middle band − (20-day standard deviation × 2). Because the bands are built from standard deviation, they widen automatically during high-volatility periods and narrow during calm ones — a self-adjusting feature unlike a fixed-percentage channel. Price touching the upper band doesn't automatically mean "overbought, sell" — in a strong uptrend, price can ride the upper band for an extended period.
One thing worth checking: A "Bollinger squeeze" — where the bands narrow sharply, reflecting unusually low volatility — often precedes a significant price move in either direction; the squeeze itself doesn't predict direction, just that a breakout is statistically more likely soon.
Someone Seeing Price Touch the Upper Band: Don't automatically read it as a sell signal — check whether the stock is in a strong uptrend first, where riding the band is common.
Someone Noticing the Bands Narrowing Sharply: Treat it as a signal a bigger move may be coming, without assuming which direction.
Use Bollinger Bands the Way
- Use the standard 20-day, 2-standard-deviation default to start.
- Don't treat a band touch alone as an automatic buy/sell signal.
- Watch for squeezes as a volatility-expansion warning, not a directional call.
See moving averages explained for the foundation these bands are built on.
