Bollinger Bands (BB)

Bollinger Bands wrap a price chart in three lines: a middle band (a 20-period moving average) plus an upper and lower band set two standard deviations away from it. Because that gap is measured in standard deviations, the bands widen automatically when a stock turns volatile and pinch together when it calms down. The envelope itself becomes a live read on volatility, not just a price boundary.

Traders read the bands in three main ways:

• Band touches: tagging the upper band flags a potentially overbought stretch and the lower band a potentially oversold one. In a strong trend, though, price can ride a band for a long time, so a touch by itself is not a signal.
• The squeeze: when the bands contract to their tightest in months, volatility is unusually low and a bigger move often follows. The bands signal that a move is coming, not which direction it will take.
• Mean reversion: in range-bound markets, price that pokes outside a band tends to snap back toward the middle 20-period average.
• Confirmation: pair band signals with volume or an oscillator like RSI. Trading every band touch on its own is the most common beginner mistake.

Picture a stock at $50 with a 20-day average of $48 and a standard deviation of $2, which puts the upper band at $52 and the lower band at $44. If quiet trading drags the standard deviation down to about $0.50, the bands tighten to roughly $49 to $47: a squeeze. A later jump to $53 on heavy volume punches through the upper band, hinting at either a genuine breakout or an overbought snap-back toward the $48 middle line.