What Are Bollinger Bands? Reading Volatility for Buy/Sell Signals

Bollinger Bands were developed by John Bollinger in the 1980s and visualize a stock's normal trading range relative to its volatility. Unlike fixed-percentage bands, they automatically widen or narrow based on actual market volatility.

How Are Bollinger Bands Calculated?

The indicator consists of three lines:

Middle Band = SMA(20)                          (20-period simple moving average)
Upper Band  = SMA(20) + (2 × Standard Deviation)
Lower Band  = SMA(20) - (2 × Standard Deviation)

Standard deviation measures how far prices over the last 20 periods have strayed from the average — in other words, volatility.

A simple example: Suppose a stock's 20-day average (SMA20) is 100 TL and its standard deviation is 4 TL.

Upper Band = 100 + (2 × 4) = 108 TL
Lower Band = 100 - (2 × 4) = 92 TL

Under normal conditions, price largely stays within this 92-108 TL range. If volatility rises (for example, ahead of an earnings announcement), the bands widen; if volatility falls, they contract.

Squeeze: A Precursor to Big Moves

When the bands contract toward each other, this is called a squeeze, and it signals that the market has entered a historically low-volatility period. Low volatility is typically unsustainable — it usually resolves into a strong directional move (a breakout).

Important: a squeeze tells you a move is likely coming, not which direction it will go. To gauge the breakout direction, you need additional context — volume, trend structure, or support/resistance levels.

Band Walking

In a strong trend, price can "walk" along the upper or lower band for an extended period. This is called band walking, and in this case touching the band is not, on its own, a reversal signal — it's actually a sign the trend is continuing strongly. This is one of the most common beginner mistakes: assuming "price touched the upper band, I should sell" — which often leads to exiting a strong trend far too early.

The %B Indicator

%B summarizes price's position within the bands as a single number:

%B = (Price - Lower Band) / (Upper Band - Lower Band)

• %B = 1 → price is exactly at the upper band
• %B = 0.5 → price is at the middle band (SMA20)
• %B = 0 → price is exactly at the lower band
• %B > 1 or %B < 0 → price has moved entirely outside the bands

Confirming With RSI

Bollinger Bands show where price is, while RSI shows how strong the momentum is. Used together:

• If price touches the upper band while RSI is also above 70, the overbought signal is more strongly confirmed.
• If price touches the upper band while RSI is in neutral territory, it's likely band walking — the trend may well continue.

Conclusion

Bollinger Bands offer a dynamic, volatility-aware framework instead of fixed levels. Their real strength comes from recognizing patterns like squeezes and band walking, and interpreting them alongside momentum indicators like RSI. On Lumina BIST you can track Bollinger Bands live on the chart alongside other indicators, and see how the AI interprets squeeze and breakout patterns in context.