Bollinger Bands

John Bollinger's construction has three lines. The middle line is a simple moving average of the closing price over a chosen number of periods, twenty by default. The outer lines sit above and below it at a chosen multiple of the standard deviation of those same closes, two by default. Because the standard deviation is computed from the same window as the average, the width of the bands is a measure of recent dispersion drawn in price units rather than a level anybody selected.

The distance between the bands is the reading. A contraction, often called a squeeze, says the closes in the window have been tightly grouped, and an expansion says the opposite. Price touching a band is not by itself unusual: with the default settings a substantial minority of closes fall outside the bands, and during a sustained move price can ride one band for many periods without the band containing it.

The common misreading treats the bands as boundaries and a touch as a sign that price is stretched. Bollinger's own writing rejects that use and describes the bands as saying whether a price is high or low relative to its recent range, which is a statement of position rather than an instruction. Practitioners disagree about the settings: a shorter window reacts faster and produces more touches, a longer one fewer, and no window is correct across instruments or across time frames. The construction also lags by definition, since every value in it is computed from closes that have already printed.