Bollinger Bands and the Box: Squeeze or Range?

Bollinger Bands are on almost every chart. They have an upper line, a lower line and a middle line, so they look like a box. Traders talk about “the squeeze” when the lines pull close together. Traders also talk about a “tight range” when price stays in a narrow band for days. Are those the same thing? This lesson says no, shows why, and reads both on a real box. It teaches a way to read a chart. It does not tell you what to do in any market.

What you will be able to do

• Say how the standard Bollinger Bands are built, and what the width of the bands measures.
• Explain why the bands are a box that is redrawn every bar, and why the Outer Box ladder is locked.
• Tell a squeeze (a statement about volatility) from a narrow trading range (a statement about a box).
• Say what a squeeze cannot tell you, and which box levels give the direction and the confirmation.
• Read one real price against a locked box and against a rolling band, and say why the two answers differ.

How the bands are built

The standard bands use two settings, 20 and 2. Here is what they mean.

1. Take the last 20 closes and average them. That is the middle band, a 20-bar simple moving average.
2. Measure how far the closes typically sit from that average. The measure is the standard deviation: square each distance from the average, average the squares, then take the square root. A big number means the closes were spread out. A small number means they were bunched together.
3. Put one line 2 standard deviations above the middle band and one line 2 below it. Those are the upper band and the lower band.

So the width of the bands, upper minus lower, is 4 standard deviations. Wide bands mean the recent closes were spread out. Tight bands mean they were close together. That is all the width says. It measures how loose or tight price has been, not which way it is going.