Bollinger Bands are three lines drawn around the price. The middle line is a moving average. The upper and lower lines sit a set distance above and below it, and that distance grows and shrinks with how volatile the price has been. They were created by John Bollinger in the 1980s and are one of the standard indicators on every charting platform.
The bands answer a simple question: is today's price high or low compared with its own recent behaviour? A move of ₹20 is huge for a quiet stock and ordinary for a volatile one. Bollinger Bands adjust for that automatically.
How Bollinger Bands are calculated
The standard settings are 20 periods and 2 standard deviations.
- Middle band: the 20-period simple moving average of the closing price.
- Upper band: middle band + 2 × the standard deviation of the last 20 closes.
- Lower band: middle band − 2 × the same standard deviation.
Bands = 20-period SMA ± 2 × standard deviation of the last 20 closes
The standard deviation is a measure of how spread out the prices are around their average. If the last 20 closes were all close to the average, it is small; if they swung widely, it is large. You do not need to calculate it by hand; what matters is the idea that it measures recent volatility.
A worked example
Suppose Infosys has a 20-day average close of ₹1,500, and the standard deviation of those 20 closes is ₹25.
- Upper band = 1,500 + 2 × 25 = ₹1,550
- Lower band = 1,500 − 2 × 25 = ₹1,450
- Band width = ₹100, about 6.7% of the price.
Now imagine a quiet month in which the closes barely move and the standard deviation falls to ₹10. The bands narrow to ₹1,480 and ₹1,520, only ₹40 apart. That narrowing is the "squeeze". If the stock then jumps to ₹1,560 on results, it is far outside the old upper band, and the bands will widen sharply over the next days as the standard deviation rises.
If prices were spread in a normal bell-shaped way, about 95% of closes would fall inside two standard deviations. Real prices are not that tidy: big moves happen more often than the bell curve suggests, so closes outside the bands are less rare than the textbook number implies.
Two useful measures: %B and band width
- %B shows where the price sits within the bands: 1 at the upper band, 0 at the lower band, 0.5 at the middle. Above 1 means the price closed above the upper band.
- Band width is (upper − lower) ÷ middle. A multi-month low in band width is the formal definition of a squeeze.
In the example above, a close at ₹1,525 with bands at ₹1,450 and ₹1,550 gives %B = (1,525 − 1,450) ÷ 100 = 0.75: in the upper part of the band, but not at the top.
The squeeze
Volatility tends to alternate: quiet periods are followed by active ones, and active ones by quiet ones. When the bands are narrower than they have been for months, the stock is unusually calm, and a larger move often follows. This is the Bollinger squeeze.
The squeeze tells you that a move may come, not which way. Traders usually wait for the price to close outside one of the bands, ideally on rising volume, and treat that as the direction of the breakout. A first break can be a fake-out, often called a "head fake", so many place a stop back inside the bands. The breakouts guide covers how to deal with false breaks.
The same idea applies to options. When a stock's bands are very narrow, its option prices are often low too, because historical volatility feeds into what option sellers charge. Here is where index option prices sit against their past year:
A low reading means options are cheap compared with the past year, the options version of a squeeze; a high reading means they are expensive. It is about index options, not any one stock, but the logic of calm periods being followed by active ones is the same.
Walking the bands
A common mistake is to treat the upper band as a ceiling. In a strong uptrend, the price can close at or above the upper band day after day while the bands widen and rise. This is called walking the band. Selling every touch of the upper band in such a trend means selling the strongest stocks early. In strong trends the middle band (the 20-day average) often acts as the support to watch instead; a close below it is an earlier sign that the trend is tiring.
Live example: Infosys indicators
Bollinger Bands are drawn on each stock's chart on its technicals page. Here are the other key readings for Infosys:
Use these to put the bands in context. If the price is at the upper band and RSI is in the high 60s or 70s with the price above the 50-day average, the stock may be walking the band in an uptrend. If the price is at the upper band but below a falling 200-day average, it is more likely a rally inside a downtrend. The scans page lists stocks breaking out of their Bollinger Bands today.
How traders use Bollinger Bands
- Range trading. In a sideways stock, some traders buy near the lower band and sell near the upper band, with a stop outside the band. This fails when the range breaks.
- Breakout trading. After a squeeze, a close outside the band on high volume is a common entry trigger.
- Trend pullbacks. In an uptrend, a dip to the middle band that holds can be an entry point.
- With RSI. A touch of the lower band with RSI making a higher low (a bullish divergence) is stronger than either alone.
- Double bottoms. A first low that closes outside the lower band, followed by a second low that stays inside it, shows selling pressure easing even though the price is near the same level.
Whichever approach you use, decide in advance which situation you are in. Range trading and breakout trading are opposites: one sells the upper band, the other buys a close above it. Mixing them without a rule leads to buying tops and selling bottoms.
Limits and common mistakes
- Band touches are not signals. The bands describe where the price is relative to recent volatility. Something else must say what to do.
- Squeezes have no direction. Guessing the direction before the break is a coin toss.
- Settings matter less than people think. 20 and 2 are standard; changing them to fit past charts rarely helps going forward.
- Gaps distort the bands. A big results-day gap can widen the bands for 20 days afterwards; see the ATR guide for another view of volatility.
Bollinger Bands are best thought of as a volatility map: they show whether a stock is calm or busy, and whether today's price is ordinary or stretched for that particular stock.