Bollinger Bands
Volatility & bands
John Bollinger's bands: a 20-day average surrounded by two standard deviations. The bands breathe with the stock's volatility.
Construction & calculation
- Center line = SMA(20) of the closing price.
- Upper band = center line + 2 x the standard deviation of the last 20 closing prices.
- Lower band = center line - 2 x that same standard deviation.
- Statistically, that puts roughly 95% of all prices within the bands.
Center = SMA(20)
Upper = SMA(20) + 2 x stdev(20)
Lower = SMA(20) - 2 x stdev(20)
Interpretation
- Narrow bands = low volatility; a breakout becomes more likely (see also Bollinger Bandwidth).
- A price outside the band is exceptional, but Bollinger warned explicitly: that is not a signal in itself. In a strong trend the price simply 'walks' along the band.
- The center line often acts as support in an uptrend.
How the signal works in this scanner
Buy signal (green)The closing price moves from inside the bands to outside, below the lower band. The scanner reads this as mean reversion: the stock has dropped statistically exceptionally far below its average and a return toward the middle becomes more likely.
Sell signal (red)The closing price breaks out above the upper band — statistically exceptionally high relative to its own average.
Watch-outs & pitfalls
- This is deliberately a contrarian reading. Anyone following the breakout school would do the opposite. So know which logic you are using and do not mix them.
- In a powerful trend this signal is dangerous: a stock that drops through its lower band in a bear market can stay there for weeks.
- Combine with a trend filter (ADX, MA200) or with a reversal signal for confirmation.