Bollinger Bands: calculation, squeeze and band touches

What it measures

Bollinger Bands wrap a moving average in an envelope set a number of standard deviations wide. The width is therefore a direct measure of recent volatility: the bands contract when the market goes quiet and expand when it moves.

The bands describe where price has been trading relative to its own recent variability. They do not describe where it should stop.

How it is calculated

These are the steps Basis performs, verified against the published definition.

1. 1

   Compute a simple moving average of the source over the chosen period. That is the basis.

2. 2

   Compute the standard deviation of the same window, using the population form — dividing by the period rather than by the period minus one.

3. 3

   Place the upper band at basis + multiplier × deviation and the lower band at basis − multiplier × deviation.

Settings

Twenty periods at two deviations puts roughly ninety percent of bars inside the bands on normally distributed returns — and crypto returns are not normally distributed, so expect more excursions than the statistics suggest. Widening to 2.5 reduces false touches on volatile pairs.

How to read it

• A touch of the upper band means price is unusually extended relative to its own recent range. In a trend it will touch repeatedly, and each touch is continuation rather than exhaustion.
• A squeeze — the bands contracting to an unusually narrow width — indicates compressed volatility. It says a move is coming; it says nothing about the direction.
• Price walking the band with the basis rising underneath is a strong trend, not an overbought market.
• The basis is often the more tradeable line: in a healthy trend, pullbacks stop near it.

Where it misleads

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