Bollinger Bands

Bollinger Bands are a set of three lines plotted on a price chart to show a stock's typical trading range and how that range is expanding or contracting over time. The middle line is a moving average, usually a 20-day simple moving average, and the upper and lower bands sit a set number of standard deviations above and below that average, most commonly two.

The formula is:

Because the bands are based on standard deviation, they widen automatically when a stock becomes more volatile and narrow when it settles down, rather than sitting at a fixed distance from price. A period of unusually tight bands, often called a squeeze, signals that volatility has compressed and traders watch for it as a setup that often precedes a sharp move once the stock breaks out of the tight range in either direction.

Investors also use the bands to gauge whether a price move is stretched. A stock pressing against or briefly piercing the upper band is often described as overbought relative to its recent range, while one testing the lower band is described as oversold, though in a strong trend price can ride along one band for an extended stretch rather than reversing immediately, so the bands work best combined with other indicators rather than as a standalone buy or sell signal.