Technical analysis

Bollinger Bands

Bollinger Bands is a technical-analysis indicator that plots a moving average with upper and lower bands set a specified number of standard deviations from it.

What it means

On a price chart, Bollinger Bands put recent price movement in context. A middle line shows a moving average; an upper and a lower line show how far prices are from that average relative to their recent variation. The conventional setting uses 20 closing prices and bands two standard deviations above and below the average, although chart settings can differ.

The bands widen when the measured variation in closing prices increases and narrow when it decreases. A close near or beyond a band describes its position relative to the selected lookback period. It does not, by itself, identify a turning point or predict the next price.

How it is calculated

For a 20-period chart calculated from closing prices:

Middle_t = mean(P_t, ..., P_(t-19)); SD_t = sqrt[sum((P_i - Middle_t)^2) / 20]; Upper_t = Middle_t + 2 × SD_t; Lower_t = Middle_t - 2 × SD_t

  • P_i is the closing price, in US$ per share, for each of the 20 periods ending at period t.
  • Middle_t is the arithmetic mean of those 20 closes, in US$ per share.
  • SD_t is their population standard deviation, in US$ per share; the sum contains 20 squared deviations. Some charting tools use a different standard-deviation convention.
  • Upper_t and Lower_t are the band values for period t, in US$ per share. The multiplier 2 has no units and is adjustable.

A period need not be a day: on a weekly chart, for example, the calculation uses weekly closing prices. Each new period drops the oldest close and adds the newest.

Worked example

Suppose a hypothetical stock has these five daily closing prices, in US$ per share: 98, 99, 100, 101 and 102. Use a five-day lookback and a multiplier of two to make the arithmetic visible; this is not the conventional 20-period setting.

  1. Find the mean: (98 + 99 + 100 + 101 + 102) / 5 = US$100.
  2. Find each deviation from the mean: −2, −1, 0, 1 and 2 US$ per share. Their squares sum to 4 + 1 + 0 + 1 + 4 = 10 (US$ per share)².
  3. Divide by five and take the square root: SD = sqrt(10 / 5) = sqrt(2) ≈ US$1.414 per share.
  4. Calculate the bands: Upper = 100 + 2 × 1.414 ≈ US$102.83; Lower = 100 − 2 × 1.414 ≈ US$97.17 per share.

The last close, US$102, falls below the upper band. This calculation says where that close sits relative to these five closes, not where the stock goes next. Different lookbacks or standard-deviation conventions produce different bands.

Why it matters before you trade

Bollinger Bands can help describe whether a proposed trade follows a recent move or occurs during a period of comparatively narrow or wide price variation. But a narrow band is not proof that a breakout is imminent, and a price above the upper band need not reverse: prices can remain near a band during a sustained move.

A pre-trade check asks separate questions about execution. How large is the order relative to typical daily volume? What bid-ask spread and market impact might it face? A chart indicator based on closing prices does not answer those questions. News, trading halts and price gaps can also change conditions that a recent-price calculation does not capture.

How PreTrAIde uses it

The product facts do not say that PreTrAIde calculates Bollinger Bands or uses them in its verdicts. Its pre-trade analysis is not chart-pattern technical analysis. For a user-built stock basket, PreTrAIde assesses factors including estimated bid-ask spread, participation in daily volume, market impact and daily volatility before any order is placed. It returns a GO, NO-GO or MODIFY verdict with reasoning; these verdicts are decision support, not recommendations.

Common mistakes

  • Treating a band touch as a trade instruction. A touch states a relationship to recent closes, not a reliable direction for the next move.
  • Assuming two standard deviations means 95% containment. The familiar 95% rule relies on assumptions that stock prices and rolling bands do not satisfy; prices are not guaranteed to stay inside.
  • Ignoring the settings. A five-day calculation and a 20-day calculation measure different windows; changing the multiplier also changes the band widths.
  • Confusing band width with trading liquidity. Band width reflects variation in the selected closing prices, not available order-book depth or the cost of a fill.

Frequently asked questions

What does it mean when a stock closes above the upper Bollinger Band?

Its closing price is above the moving average plus the selected number of standard deviations for that lookback. That describes an unusually high close relative to the selected window; it does not establish that the price will reverse or continue.

What is a Bollinger Band squeeze?

A squeeze refers to bands that have narrowed as measured variation in recent closing prices has fallen. It does not establish when a larger move will happen or which direction it would take.

Do Bollinger Bands show the cost of placing a stock trade?

No. They are calculated from prices, while execution costs also depend on factors such as the bid-ask spread, order size, available liquidity and market impact.

Related terms

Technical analysis Technical analysis is the study of historical prices, trading volume and chart-derived indicators to describe market trends and patterns, without relying primarily on company financial statements. Moving average Moving average is the average of a stock’s prices over a rolling number of trading periods, used to smooth short-term fluctuations and describe its past price trend. Standard deviation Standard deviation is a measure of how widely observations, such as daily stock returns, vary around their average, expressed in the same units as those observations. Volatility Volatility is a measure of how widely an asset’s returns vary over a specified period, usually expressed as the standard deviation of returns. Breakout Breakout is a move in a stock’s price beyond a defined support or resistance level, usually assessed using a specified price, time period and confirmation rule. Pre-trade analysis Pre-trade analysis is the assessment of a proposed stock order or basket before placement, estimating execution costs, liquidity and risk to inform the investor’s decision and execution approach.

Technical analysis

Momentum Mean reversion Relative strength index (RSI) MACD Support and resistance Trend following Market sentiment analysis News trading All glossary terms →

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Educational content, not investment advice. PreTrAIde is analysis software, not a broker: it never executes orders, and its verdicts are decision support, not recommendations to buy or sell.