Bollinger Bands
In short
Price bands 2 standard deviations above/below the 20-day moving average
Three lines around a stock's price: a middle average and two outer bands. When the price touches the upper band, it might be overbought. Touch the lower band, possibly oversold. When the bands squeeze together, a big move is coming.
Bollinger Bands consist of a 20-period SMA (middle band) plus/minus 2 standard deviations. Band width indicates volatility. Price touching upper/lower bands signals potential reversal. Band squeeze (low volatility) often precedes major breakouts.
Formula
Upper Band = SMA(20) + 2σ; Lower Band = SMA(20) - 2σRelated concepts
- Simple Moving Average (SMA) — Take the last 50 days of prices and average them. That's the 50-day SMA. It smooths out daily noise so you can see the real trend. Price above its SMA = uptrend; below = downtrend.
- ATR (Average True Range) — ATR tells you how much a stock typically moves in a day. If a $100 stock has ATR of $3, it moves about 3% daily. High ATR means volatile; low ATR means calm. Useful for setting stop-loss distances.
- Keltner Channels — Similar to Bollinger Bands but uses ATR instead of standard deviation. Three lines: middle EMA and upper/lower channels. Price outside the channels suggests a strong trend. Inside = normal trading range.
- RSI (Relative Strength Index) — RSI scores a stock from 0–100. Above 70 means it's been rising so fast it might be due for a pullback (overbought). Below 30 means it's fallen a lot and could bounce (oversold).