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What Are Bollinger Bands?

Bollinger Bands, a popular tool among investors and traders, help gauge the volatility of stocks and other securities to determine if they are over- or undervalued. Developed in the 1980s by financial analyst John Bollinger, the bands appear on stock charts as three lines that move with the price. The center line is the stock price's 20-day simple moving average (SMA). The upper and lower bands are set at a certain number of standard deviations, usually two, above and below the middle line.

The bands widen when a stock's price becomes more volatile and contract when it is more stable. Many traders see stocks as overbought as their price nears the upper band and oversold as they approach the lower band, signaling an opportune time to trade.1

While valuable, Bollinger Bands are a secondary indicator that is best used to confirm other analysis methods. Below, we guide you through how to interpret Bollinger Bands, when the tool is best used, and what other indicators are best matched with it.

Key Takeaways

• Bollinger Bands are a technical analysis tool that shows the volatility of an asset and potential overbought or oversold conditions by plotting two standard deviations away from a simple moving average.
• When a stock's price is close to the upper Bollinger Band, it might be overbought; if it's near the lower band, it might be oversold, signaling potential trading opportunities.
• Bollinger Bands work best as a secondary indicator, providing confirmation when used alongside other tools like relative strength index (RSI) and moving average convergence divergence (MACD).
• Widening bands indicate rising market volatility and may precede significant price moves, while narrowing bands suggest decreasing volatility and a possible impending breakout.
• Trading platforms often include Bollinger Bands as a feature, allowing easy visualization of price movements and adaptability to different market conditions.

Meet John Bollinger: The Innovator Behind Bollinger Bands

John Bollinger, CFA, CMT, has been a major influence in technical analysis and is best known for developing Bollinger Bands in the 1980s. Bollinger combined his background in mathematics and engineering with financial market analysis to create this tool, which uses a moving average and the statistical measure of standard deviation to assess the volatility and trends of stock prices.2 The tool has since become a staple in technical analysis. He is also the founder of Bollinger Capital Management, a money management company, and has been a prominent commentator and analyst on market conditions.3

Bollinger Capital Management. "John Bollinger, CFA, CMT."