In this lesson
- compute Bollinger Bands step by step
- understand what a standard deviation is and why the bands widen
- find a squeeze on the chart and see what came after it
Bollinger Bands are a rubber tube around the price. When the market is calm, the tube deflates and hugs the candles. When it gets wild, it inflates. Professor Wick once tried to stuff the whole chart into it – almost nine candles out of ten fit, no more.
How they are computed#
The Bollinger Bands have three lines:
- middle (MB) – the simple average of 20 closes,
- upper (UP) – middle + 2 × standard deviation,
- lower (DN) – middle − 2 × standard deviation.
The standard deviation measures how far from the average the prices in the window typically are. When the price moves wildly it is large and the bands spread apart. When the price stands still it is small and the bands come together. Go through the calculation:
Bollinger Bands 20, 2: the dashed middle line is SMA 20; the upper and lower bands lie two standard deviations from it.
Mar 20, 2024: the average of the last 20 prices is 67,316.14, and prices typically deviate from it by 3,309.23. Upper band = 67,316.14 + 2 × 3,309.23 = 73,934.59, lower = 60,697.68.
On the whole chart#
- Bollinger Bands 20, 2 (the middle line is SMA 20)
Notice two things. In a strong trend the price "walks the band" – it closes at the upper edge or above it day after day. And the bands are no wall: on the daily Bitcoin chart the price ended outside them roughly one day in seven.
The squeeze: quiet before a move#
When the bands are very narrow, the market is unusually calm. Such a narrowing is called a squeeze, and a big move often follows. Find it:
Click the candle where the Bollinger Bands are narrowest.
No candle picked yet.
What the settings do#
The length changes how many candles the average and the deviation are computed from; the multiplier changes how far away the bands are. With a multiplier of 2 more prices stay inside than with 1, but never all of them. Move the length:
The price broke out of the bands 30×. The common default setting – try moving the slider both ways.
On Binance#
Original mode → indicator icon → Main Indicator → BOLL. You set the length (Length, default 20), the multiplier (Multiplier, default 2), the fill between the bands and the colours of the UP, MB and DN lines:
Touching a band is not a signal
The price at the upper band does not mean "expensive, sell", and at the lower band "cheap, buy". In a strong trend the price sticks to a band for weeks. The bands show how wild the market is, not where it will go.
Common myths#
- "95% of prices lie inside the bands." That holds for a normal distribution, which prices do not have. On Bitcoin almost one day in seven ended outside.
- "A squeeze shows the direction." It only shows that something is coming. You have to look for the direction elsewhere.
- "Touching the lower band is a cheap buy." In a sell-off the price happily slides further along the lower band.
Summary
- Middle line = SMA 20, bands = ± 2 standard deviations.
- A wild market widens the bands, a calm one narrows them.
- A squeeze announces a move, not its direction.
- On Binance: Original → indicator icon → Main Indicator → BOLL (20, 2).