Bollinger Bands

Bollinger Bands are a volatility indicator consisting of three lines: a moving average in the middle (typically a 20-period simple moving average) and an upper and lower band plotted a set number of standard deviations — usually two — above and below it. Because standard deviation measures how spread out recent prices are, the bands widen when volatility rises and contract when the market goes quiet, wrapping price in an adaptive envelope.

For example, if Bitcoin trades calmly for weeks, the bands squeeze tightly together; traders call this a Bollinger squeeze and treat it as a warning that a volatile move often follows, though the indicator does not say in which direction. Conversely, when price rides along the upper band during a strong rally, that reflects persistent momentum rather than an automatic sell signal.

A common misconception is that touching a band means price must reverse toward the middle; roughly 5% of price action is expected outside two-standard-deviation bands even in normal conditions, and in strong trends price can hug a band for extended periods — a behavior known as walking the band. Traders therefore combine the bands with momentum indicators or candlestick signals, using band touches as context rather than triggers.