Imagine wrapping a rubber band around the price chart. When the market is calm and prices barely move, the band hugs the price tightly. When the market goes crazy and prices swing wildly, the band stretches wide. That stretchy wrapper is exactly what Bollinger Bands draw on your chart.

How they're built

Three lines, one simple recipe:

  • Middle band — a 20-day Simple Moving Average. The trend line.
  • Upper band — the middle plus 2 standard deviations of the last 20 closes.
  • Lower band — the middle minus 2 standard deviations.

"Standard deviation" is just a measure of how spread out the prices have been. Two standard deviations covers about 95% of normal price movement, so when price pokes above the upper band or below the lower band, it's in the rare 5% — statistically unusual.

What the band-width tells you

The gap between the upper and lower bands is your volatility gauge:

  • Bands squeezed tight — low volatility. The market is sleeping. A big move is often brewing underneath.
  • Bands flared wide — high volatility. The market is energetic. Trends are running.

The "Bollinger Squeeze" — when bands compress to multi-month lows — is one of the most-watched setups in technical analysis because it precedes nearly every explosive breakout.

How traders use them

  1. Mean reversion in sideways markets. When price touches the upper band in a ranging market, traders sell into it expecting a return to the middle. Touching the lower band → buy. Works well only when there's no strong trend.
  2. Trend confirmation. In strong trends, price "walks the band" — repeatedly touches the upper band in uptrends, lower band in downtrends. That's NOT a reversal signal; it's the strength of the move.
  3. Volatility percentage. Many traders track band-width as a percent of the middle band. Below 5% on a daily chart = squeeze territory; above 15% = high volatility, expect mean reversion soon.
Bollinger Bands don't predict direction. They predict character — whether the next move is likely to be quiet or violent. That alone is a huge piece of information.

The gold connection

Gold spends long stretches in low-volatility consolidation, then erupts on a macro catalyst (Fed surprise, geopolitical shock, inflation print). The Bollinger Squeeze on a daily gold chart is one of the best lead indicators for those eruptions. When you see bands hugging gold for 3+ weeks, position size carefully — the market is loading the spring.