Bollinger Bands and Volatility
Bands widen and shrink with volatility — the squeeze is the signal.
Written and reviewed by the Fundezy team · how we produce this
Bollinger Bands draw three lines: a middle moving average (typically SMA 20) plus bands placed a fixed number of standard deviations above and below it. The platform's EA library provides iBands, and the concept underlies dozens of strategies.
What the bands measure
Standard deviation grows when price moves violently and shrinks when price quiets — so the band width is a live volatility gauge:
- Wide bands = high volatility, strong conviction moves underway.
- Narrow bands ("the squeeze") = compressed volatility, energy building.
The squeeze-and-expand cycle
Volatility clusters: quiet periods beget explosive ones. The classic sequence is bands squeezing tighter and tighter, then price breaking out with a band expansion. The first strong bar that closes outside the squeezed range frequently leads a sustained move — which is precisely when the BUY STOP / SELL STOP orders from Course 01 earn their keep.
Two ways to use bands
- Mean reversion in ranges — in a sideways market, touches of the outer band tend to revert toward the middle band. Fade the tag, target the middle.
- Trend following ("band walks") — in a real trend, price rides the band rather than reverting. Serial closes outside the band signal strength, not a reversal.
The skill is knowing which regime you're in (Course 02 structure first — sensing a theme?). Mean-reverting band trades in trends get run over; trend trades in ranges churn.
Bands + RSI
Bands tell you where price is statistically stretched; RSI tells you how fast it got there. An outer-band tag with RSI extreme in a flat market is a high-quality fade setup; the same tag with RSI trending in the 50–60s during a trend is a continuation signal.
A note on the statistics
Bands are ±2 standard deviations under a normal-distribution assumption. Real price returns have fat tails — price exceeds the bands more often than a pure Gaussian model implies. Treat the bands as calibrated zones, not mathematical certainties.
By the numbers
John Bollinger introduced the bands in the 1980s; the standard setting is a 20-period middle average with bands at ±2 standard deviations. Under a normal distribution that envelope contains about 95% of observations — and because real price returns have fat tails, price exceeds the bands more often than the Gaussian 5% suggests.
Check your understanding
3 questions · answer all, then submit.