Bollinger Bands

What it measures

A 20-day moving average (the middle band) plus bands 2 standard deviations above and below it - a volatility-relative price envelope.

Formula

Middle = SMA(20); Upper/Lower = Middle +/- 2 x StdDev(20)

Normal range

Price spends most of its time inside the bands by construction (roughly 95% under a normal-distribution assumption, though real returns aren't perfectly normal). A touch of the upper or lower band is not inherently a signal on its own.

How it fails

Bands widen and narrow with recent volatility, so a "band touch" means something different in a calm regime than a volatile one - price can also "walk the band" for an extended stretch during a strong trend without reverting to the middle.

Related metrics

RSI, MACD, Realized Volatility

Bull read

A squeeze (narrowing bands) followed by an upside breakout has sometimes preceded a strong trending move.

Bear read

Touching the upper band in a strong uptrend is frequently just trend continuation, not an overextension signal.