Bollinger Bands and Volatility Regimes
Bollinger Bands place a moving average between upper and lower volatility bands, commonly two standard deviations away. They describe the dispersion of the selected price series around its recent average.
How it works
A conventional setup uses a 20-period SMA with upper=SMA+2σ and lower=SMA−2σ. Platforms can differ in population versus sample standard deviation and input series. Specify both. Band width changes with recent dispersion; a squeeze means the measured recent range of variation narrowed, not that the next move’s direction is known.
Worked example
If the 20-period mean is 100 and the chosen standard deviation is 2, the bands are 104 and 96. A close of 105 lies above the upper band. If mean and dispersion subsequently rise, price can remain near the upper band during a trend. The first outside close is not automatically a sell signal.
Amounts, prices and scenarios are fictional teaching examples. They exclude any effects not explicitly stated and are not trade recommendations.
Limits and common mistakes
Prices are not independent normally distributed draws with a fixed mean and variance, so two standard deviations do not guarantee a fixed probability of containment. News, gaps and volatility clustering can make breaches frequent.
Knowledge check
Does a narrow squeeze tell you whether the breakout will rise?
Read the explanation
No. It describes recent dispersion. Direction needs a separately specified observation, and the breakout can fail.
References and further reading
These sources explain the underlying concepts and specifications. They do not endorse QBMFX Academy. Check the relevant market, protocol version and reporting rules before applying an example.