Bollinger Bands: Measuring Volatility, Price Expansion, and Mean Reversion

Encyclopedia Classification

Category: Technical Indicators • Volatility Analysis • Statistical Price Analysis

Discipline: Volatility Measurement • Mean Reversion • Trend Analysis • Probability Analysis

Prerequisites

• Article 161 — Trend Analysis: How Professionals Identify Trend Strength, Weakness, and Reversals

• Article 164 — The Relative Strength Index (RSI): Measuring Momentum, Divergence, and Market Strength

• Article 165 — MACD: Understanding Trend Momentum, Convergence, Divergence, and Professional Signal Interpretation

Related Articles

Average True Range (ATR) • Keltner Channels • Standard Deviation • Volatility • Moving Averages • Mean Reversion

Definition

Bollinger Bands are a volatility indicator that measures how far price is moving from its average using standard deviation.

Created by John Bollinger in the early 1980s, the indicator consists of three dynamic lines:

• Upper Band

• Middle Band

• Lower Band

Unlike fixed support and resistance levels, Bollinger Bands expand and contract automatically as market volatility changes.

Professionals use Bollinger Bands to measure:

• Volatility

• Trend strength

• Price expansion

• Market compression

• Potential continuation

• Potential exhaustion

Beginner Explanation

Imagine stretching a rubber band around price.

When the market is calm:

The rubber band becomes tight.

When the market becomes volatile:

The rubber band stretches.

Bollinger Bands work in a similar way.

They widen during periods of high volatility and narrow during periods of low volatility.

This simple behavior provides valuable clues about future market activity.