The three lines
The usual setting: the middle line is a simple moving average of the last 20 sessions. The upper band = the average + 2 × the standard deviation. The lower band = the average − 2 × the standard deviation. The standard deviation is a number measuring how far, on average, prices sit from their mean.
What does a squeeze describe?
A squeeze is when the width of the bands is narrower than usual for that stock. It describes one thing: volatility in recent sessions has been low. Prices are not moving far from their average.
Quiet periods in markets are sometimes followed by larger moves, which is why many people watch the squeeze. But a squeeze does not say whether the move will be up or down, or when. And it can last longer than expected.
Price touched the upper band: what does it mean?
It means price is about two standard deviations away from its 20-session average. In a strong rise, price can "walk along" the upper band for days in a row. So a touch describes distance from the average; it is not a ceiling price must bounce off.
Look for a squeeze
Open any stock chart on FoudaLens, switch on Bollinger Bands, and find a stretch where the bands narrowed. See what the price did afterwards.
Check yourself
1. The average is 20 and the standard deviation 0.50. Where is the upper band?
2. The bands have narrowed sharply. What does that describe?
Summary
- Bollinger = a 20-session average with two bands two standard deviations away.
- A squeeze describes low volatility and does not say which way the next move goes.
- Touching a band describes distance from the average, not a buy or sell signal.